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Full text of "Ten thousand commandments"



Ten Thousand 
Commandments 

A Story of the Antitrust Laws 

by 
HAROLD FLEMING 



PRENTICE-HALL, INC 



UNIVERSITY 
OF FLORIDA 
LIBRARIES 




mar 



Ten Thousand Commandments 



Digitized by the Internet Archive 
in 2013 



http://archive.org/details/tenthousandcommaOOflem 



Ten Thousand 
Commandments 

A Story of the Antitrust Laws 



HAROLD FLEMING 



new york PRENTICE-HALL, INC. 



First 'Printing June 1951 

Second Printing March 1952 



Copyright . 1951, by PRENTICE-HALL, INC., 10 Fifth Avenue, New 
York. All rights reserved. No part of this book may be reproduced in 
any form, by mimeograph or any other means, without permission in 
writing from the publishers. Printed in the United States of America. 



To My Daughter 

Linda 

in part-payment (I hope) for 

the hikes and swims 

we couldrtt take together 

while 1 was writing this story. 



1 



c 



Preface 



This book is not for lawyers, but for people. Or, if 
that distinction sounds unfair to my legal friends, let's 
say it's for laymen. The lawyers may read it if they 
want to. I put the citations in for them. 

I have tried to write it as a story, not as a thesis or a 
document. To me, the material makes an astonishing 
yarn. It is about people. It is not, at least in intention, 
about the law, but about lawyers; not about business, but 
about businessmen; and not about the government, but 
about government lawyers. 

For these people have argued, burned the midnight oil, 
puzzled, squirmed, gloated, and despaired over the things 
related here: mostly, one might think, about the meaning 
of a few little words here and there in the law. But, as 
in chess, a few little pawns can make the players squirm, 
and in baseball a half -inch difference in a swing will make 
the difference between a home-run and a pop fly. The 
difference here is that, in the antitrust law, a few little 
words can change, not only the disposition of huge sums 
and the location of huge plants, but eventually, the very 
structure of American industry. 

The story told here was first rehearsed on the business 
page of the Christian Science Monitor, in a series of 28 
pieces running through the summer of 1949. Some of 
the high spots then got a sort of quick telling in the spring 
of 1950 in the Harvard Business Revieuo and in Harper's 
magazine. 



viii PREFACE 

I wrote this book with the help of a number of business 
friends, including some antitrust lawyers. Some of them 
goaded me, while others tossed documents, tomes, and 
decisions at me. I am a business reporter. There were 
times during the writing, I must admit, when I was not 
too grateful for this urging, and felt that if I never read 
another page of Congressional testimony, Supreme Court 
opinion, or bureau ruling on the antitrust laws, it would 
still be too much. But now that is over, here are thanks 
for the shove and the help. 

Harold Fleming 
New York, N. Y. 
April 1951 



Contents 



PREFACE vii 

1 . THE SUPREME COURT REWRITES THE 

LAW 1 

Court finds meanings not intended by Congress. 
Judicial legislation. Southeast Underwriters case. 
Portal case. Overtime case. Justices' dissenting opin- 
ions. "Judicial withdrawal." New powers to admin- 
istrative agencies. 

2. EVERYBODY OUT OF STEP BUT THE 

GOVERNMENT LAWYERS 9 

Ten thousand commandments. Cloud over business 
policies. Quantity discounts. "Conscious parallel ac- 
tion." Delivered prices. "Mill-net" theory. "Good 
faith" price competition. Exclusive dealer contracts. 
Integration. Retroactive interpretations. Jail sen- 
tences. 

3. THE ARGUMENT OVER WHETHER 

THERE IS AN ARGUMENT .... 18 

Basing point case. Federal Trade Commission contra- 
dictions. A divided Supreme Court. Arguments that 
law should be general and that it should be concise. 
Uncertainty in the law versus specific rules. 

4. THE MORTON SALT CASE 25 

Purpose of the Clayton Act. Its heart: limits on price 
discrimination. Quantity discounts excepted. Robin- 
son-Patman Act requires cost justification. Morton 



J 



CONTENTS 

4. THE MORTON SALT CASE (Cont.) 

Salt discounts. "Reasonable possibility." Functional 
discount. Consumer's interest. Difficulty in cost 
justification. 

5. THE FORGOTTEN CONSUMER . . . 

Early Sherman Act cases. Resale price maintenance 
cut down. FTC requires it in Detroit gasoline case. 
Contrary decision in Milwaukee. "Functional dis- 
counts" protected by FTC. "Phantom" markups. 
FTC attention to cost, discouraging quantity discounts, 
freight absorption, and "good faith" price competition. 
Courts' preoccupation with competitors, lessening 
competition. Cartel-like results. 

6. DO WE REALLY WANT COMPETITION? 43 

High cost of distribution. Amounts at stake. Earlier 
regulation for consumer's benefit. New regulation for 
competitor's benefit. NRA and successor laws. 
Robinson-Patman Act put through by distributors' 
groups. Price-discrimination brakes tightened. Cor- 
porate lawyers seek ways to cut prices legally. 

7. MOUSETRAP MAKER'S HAZARD ... 50 

Birth of Standard Oil Trust and of Aluminum Com- 
pany. Conservation versus innovation. Growth of 
Aluminum. Justice Department sues. Previous pur- 
poses of the Sherman Act. Trial and appeal. New 
definition of "exclusion." Stories of General Electric's 
Carboloy and Du Pont's cellophane. 

8. OPPORTUNITY FOR ABUSE 59 

Justice Department "not attacking bigness." Supreme 
Court's opinions on "mere size" in Steel, Swift, Alcoa, 
Tobacco, and Griffith cases. Court's development of 
new crime of "monopolv power" in Alcoa, Tobacco, 
and Griffith cases. "Putative" competitors also con- 
sidered. 



CONTENTS xi 

9 THE "VIRULENT GROWTH OF 

MONOPOLY POWER" 67 

Continuing charges of increasing concentration of 
business in bigger companies. Contrary evidence in 
recent reports by Commerce Department, Federal 
Reserve Board, Committee for Economic Development. 
De-concentration in oil, steel, insurance. Statistical 
tricks. Big-company mortality. 



10. OLIGOPOLY 74 

Alleged danger to competition in "Big Three's and 
Four's." Differs from "virulent growth" charge. 
FTC report on concentration. "Identical prices." 
"Administered prices." "Price leadership." Supreme 
Court widens definition of "conspiracy" and use of 
circumstantial evidence. 



1 1 . CONCENTRATION AND COMPETITION 84 

Criticisms of FTC report. Statistical slant. Narrow 
definition of an "industry." Concentration no yard- 
stick of competition. Building versus automobile in- 
dustry. Some most "concentrated" industries have best 
price record. Competition in phonograph, television, 
and automobile industries. Interindustry competition: 
fibers, fuels, communication, chemicals. Weary com- 
petitors. 



12. MONOPOLISTIC COMPETITION ... 93 

Court views on "identical pricing" in Cement, Pevely 
Dairy cases. Gasoline price matching. Nonprice 
competition, in quality, service, availability, terms, etc. 



13. ADMINISTERED PRICES 99 

"Pure" and "impure" competition. Industrial concen- 
tration and price behavior unrelated. "Rigid" prices 
long known. Examples of price leadership. Admin- 
istered prices versus gray-market prices. 



xii CONTENTS 

14. INTEGRATION 107 

Recent vertical integration. Charge that "unit of tech- 
nological efficiency is the plant." Interdivision "sub- 
sidies." Illustration of the integrated corn-hog grower. 
Oil integration advantages. Congressional attacks. 
Supreme Court views in Schine, Paramount, Columbia 
Steel cases. A&P charge. 

15. INTEGRATED WE STAND 108 

Oil integration. Testimony on advantages of integra- 
tion in oil, aluminum, dry goods, groceries, cotton 
textiles. Advantages listed: stability of profits, of 
supply, of market. Attack on it threatens consumer 
and national defense. 

16. THE GREAT ATLANTIC & PACIFIC 

TEA COMPANY 124 

Preliminary investigation. Robinson-Patman Act back- 
ground. Antitrust Division wins on fourth try. In- 
flammatory language. New use of word "boycott." 
Attack on A&P's buying methods. Antitrust's aston- 
ishing two-price theory. "Phantom brokerage." The 
invariable grievance: lowered prices. 

17. A STRANGE NEW DEFINITION OF 

"MONOPOLIZE" 134 

A&P's interdepartmental accounting. Antitrust attacks 
A&P's interdepartmental "subsidies," its "uneconomic" 
retail profit rate, its lowering of gross markups to get 
more volume, and its price-wars in some areas made 
possible by profits in others. Impossibility of killing 
off all competitors in grocery business. 

18. THE ATTACK ON BIGNESS IN 

BUSINESS 143 

Difference between this and attack on comparative big- 
ness by industry. Bigness by assets or sales? An emo- 
tional definition of "big." Horns and tail. Celler bill 
to require justification of size. Implications. 



CONTENTS xiii 

19. THE JOB OF BIG BUSINESS 148 

Are the "bigs" big enough? Increased capital costs. 
"Bigs" spread risks. Anticipate obsolescence by di- 
versifying markets and products and by research. 
Innovation versus monopoly as road to profits. "Bigs" 
compete with "bigs," not with little businesses. Roles 
of each. Interdependence and interrelations between 
big and little businesses. 

20. BIG CORPORATIONS AND PEOPLE . . 157 

Fear of social, political effect of corporate growth. 
Historic precedents for this fear. The nostalgic ap- 
proach. Corporate goal, to stay in business. Security 
for employees. Life employment. New corporate 
personnel policies. Corporate responsibilities: to cus- 
tomers, stockholders, employees, government agencies. 

21. "BREAK 'EM UP" 164 

Leading Antitrust divestiture suits. Legal basis in 
recent Supreme Court decisions. Antitrust now seek- 
ing more divestitures. Resulting vast powers of Anti- 
trust economists. Suggested yardsticks for excessive 
size and formulas for breakup. Difficulties in each. 
Immediate threat to expansion. 

22. HOW THE GOVERNMENT WINS ITS 

CASES 171 

Bill of Rights. Antitrust's use of subpoena. Unwieldy 
size of recent cases. Antitrust's astonishing choices of 
venue. Inflammatory statements to juries. Use of 
criminal indictments to extort consent decrees. Retro- 
active applications of new meanings found in Sherman 
Act. 

2 3. ARM CHAIR ECONOMICS 180 

Veblen's Theory of the Leisure Class and Engineers 
and the Price System. Influence in the early Thirties. 
His contribution to attacks on "administered prices," 
"dominant position," and "monopolistic competition." 



xiv CONTENTS 

23. ARM CHAIR ECONOMICS (Coin.) 

Taken up by Antitrust and sold to Supreme Court. 
The intellectuals' "vacuum of information." 



24. FOLKLORE OF TRUST-BUSTING ... 186 

The bed-time horror story. Fear of bigness. Tradi- 
tional American ambivalence about it. Eighteen illegal 
aspects of business. Feelings behind the theories: 
paranoia, the "projection" of hostility and of power 
goals, compulsion neurosis, economic perfectionism. 
Possible religious source: dualism of God versus Satan 
becomes modern crusade against Evil Business for 
Benevolent Government. 



25. CONCLUSION 193 

Contrast between business morals and federal courts' 
findings. Why public does not understand. Purpose 
to stop innovation. Cost to consumer. Jeopardy to 
national defense. Political danger in growth of ad- 
ministrative power. 



BIBLIOGRAPHICAL REFERENCES 197 



Ten Thousand Commandments 



I. The Supreme Court Re- 
writes the Law 



The Constitution of the United States of America 
begins with the following line: 

"Article 1, Section 1. All legislative Powers herein 
granted shall be vested in a Congress of the United 
States which shall consist of a Senate and House of Rep- 
resentatives." 

The "old" Supreme Court (before 1937) struck down 
many an act of Congress, on the ground that it con- 
flicted with the Constitution. 

The "new" Supreme Court (since 1937) has never 
called any act of Congress unconstitutional. But it has 
developed a new habit, which circumvents Congress. 
Although it undoes nothing that Congress has done, it 
does many things that Congress has refused to do. It 
legislates and, in effect, writes laws that Congress refuses 
to write. 

In fact, in a number of cases it has found meanings in 
the law so astonishing, so upsetting, and so obviously con- 
trary to the will of Congress that Congress has had to 
rush through some kind of corrective law or resolution. 

The Court did this, for instance, in the Southeast Un- 
derwriters case, 1 the portal-to-portal case, 2 and the over- 
time-on-overtime case.* 



* References in text are numbered by chapters and refer to notes 
given in Bibliographical References, pages 197-206. 

1 



2 THE SUPREME COURT REWRITES THE LAW 

This is not to say that the Supreme Court should never 
make law. Sometimes it has to, because Congress failed 
to. Thus, for instance, as Justice William O. Douglas 
has said, 

The legislative solution is often to write two opposing 
ideas into a statute ... the battle that raged before the 
legislature is now transferred to the Court ... A hiatus may 
be left in a law. The crucial matter may have been too 
explosive for the legislators to handle . . . The necessity 
to fill in the gap is then presented to the court. And the 
judges are left at large in a field that the legislature lacked 
capacity to define. To a degree the same problem is pre- 
sented to the judiciary when vague and general language is 
employed like the words "fair" or "just" or "equita- 
ble." . . . 3 

And witness the remark of a weary Congressman in 
the closing debate on the Robinson-Patman Act (of 
which this book will have much to say) . 

"Bills ofttimes are vague and ambiguous. . . . You 
might as well know that the Bill finally agreed upon by 
the conferees . . . contains many inconsistencies, and 
the courts will have the devil's own job to unravel the 
tangle . . ." 4 

But the Supreme Court has gone far beyond mere 
pinch-hitting for Congress or filling in the gaps in mean- 
ing that Congress lacked the nerve to fill in. 

For instance: In 1869, the Supreme Court ruled flatly 5 
that insurance companies should be subject to state, 
not federal regulation. Around that decision had been 
woven a whole structure of state regulation. This ar- 
rangement, as the record of the companies has shown 
since 1907, has worked astonishingly well. Congress let 
the subject alone and created no federal agency to deal 
with insurance. But in 1944 the Supreme Court, in a 
case brought by the Antitrust Division of. the United 



THE SUPREME COURT REWRITES THE LAW 3 

States Department of Justice, reversed this 70-year-old 
decision. 6 

The result was total confusion. Said Justice Jackson 
for the dissenting minority of the Court, "A poorer time 
to thrust upon Congress the necessity for framing a plan 
for nationalization of insurance control would be hard to 
find. . . . Vast efforts have gone into the development 
of state regulation. . . . Overturning the precedents of 
IS years governing a business of such wide ramifications 
cannot fail to be the occasion for loosing a flood of litiga- 
tion and of legislation. . . ." 

Congress then had to rush through the "moratorium" 
of March 9, 1945, on application of the federal antitrust 
laws to insurance, until January 1, 1948, making those 
laws applicable to insurance after that date only "to the 
extent that such business is not regulated by state law." 

In 1936 Congress passed the Fair Labor Standards Act, 
sometimes called the Wages and Hours Act. It set 
minimum hourly wages, required time-and-a-half pay for 
work done over 40 hours a week, and set up a Wage 
and Hour Division in the Department of Labor. This 
Act rested on or assumed a body of practices and cus- 
toms in the relations between millions of workmen and 
hundreds of thousands of employers, and on a body of 
legal assumptions. Among these were three: (a) that 
the law applied only to interstate commerce, as then de- 
fined; (b) that working time was calculated on the time 
worked; and (c) that overtime was calculated by current 
practices. 

In short order the Supreme Court upset all three as- 
sumptions. First it found 7 that elevator operators and 
other building employees in two loft buildings, one in 
Philadelphia and one in New York, were "in interstate 
commerce," because "without light and heat and power 



4 THE SUPREME COURT REWRITES THE LAW 

the tenants could not engage, as they do, in the produc- 
tion of goods for interstate commerce . . ." 

Then it ruled 8 that wages, for time-and-a-half calcula- 
tion, must be figured on a "portal-to-portal" basis. In- 
dustry practice had been otherwise. The Wage and 
Hour Administrator had ruled otherwise. Congress had 
assumed otherwise. Pay for years had been figured 
otherwise. Suddenly thousands of employers found 
themselves open to suits for literally billions of dollars 
in back-pay. Congress had to rush through a law to 
take care of the impasse. 

The law had said nothing about "overtime-on-over- 
time." It had assumed standard industry practice. But 
certain members of the AFL Longshoremen's Union in 
New York filed suits for back pay on the basis of a 
different calculation. The union itself opposed the suit, 
agreeing with the employers' interpretation of the con- 
tract. But the Supreme Court, by five, to three, in June 
1948 upheld the claims. 9 

Said The New York Times on July 20, 1948 of the 
case: "The verdicts resulted in great confusion, particu- 
larly in the stevedoring and construction industries. Em- 
ployers said the verdicts would cost millions of dollars. 
The government probably would have had to pay much 
of that because the claimed liability developed when dock 
traffic consisted largely of war supplies." So Congress 
passed and the President signed a bill to outlaw these 
wildcat claims and to make the law read explicitly as 
practically everybody, except a handful of longshore- 
men and five members of the Supreme Court, had as- 
sumed it meant in the first place. 

These, however, are only a tithe of the cases in which 
the "new" Supreme Court has upset going trade practices, 
Congressional intentions, and existing legal assumptions. 



THE SUPREME COURT REWRITES THE LAW 5 

Other cases in which it has created confusion by aston- 
ishing novel rulings include the matters of reciprocal 
federal-state tax immunity, the tidelands oil question, the 
Christoffel decision 10 upsetting a 150-year-old Con- 
gressional precedent on what constitutes a committee 
"quorum," and many others. 

Justices of the Supreme Court have themselves, in cases 
where they dissented from the majority decision, fre- 
quently commented on the Court's new willingness to 
invade Congress' field of legislation. Thus Justice 
Roberts in the Hutcheson case n stated, "I venture to 
say that no court has ever undertaken so radically to 
legislate where Congress has refused to do so." 

And Justice Stone: "I think that the responsibility of 
departing from the long-accepted construction of this 
statute should be left to the legislative branch of the gov- 
ernment to which it rightfully belongs." 12 

Justice Douglas: "The necessity of resorting to such a 
circuitous route is sufficient evidence to me that we are 
performing a legislative function in finding here a defini- 
tion of a crime which will sustain this indictment." 13 

Justice Frankfurter: "If ever there was an intrusion 
by this Court into a field that belongs to Congress, and 
which it has seen fit not to enter, this is it." 14 

Justice Stone: "It is not for this Court to adopt policy, 
the making of which has been by the Constitution com- 
mitted to other branches of the government. It is not 
its function to supply a policy where none has been de- 
clared or defined and none can be inferred." 15 

Justice Murphy: ". . . the proper course is to seek 
amendatory legislation from the Congress, not to fabri- 
cate authority by ingenious reasoning based upon pro- 
visions that have no true relation to the specific prob- 
lem." 1G 



6 THE SUPREME COURT REWRITES THE LAW 

Justice Rutledge: "But we are as often told that Con- 
gress should perform the creative act in Congress' field. 
This should be most true where what we are called upon 
to recreate is Congress' own handiwork. If Congress 
intended the Administrator to act retroactively, Congress 
wholly failed to express this purpose." 1T 

Justice Burton: ". . . I am obliged to dissent from the 
majority of this Court and to sound a warning against the 
dangers of overexpansion of judicial control into the fields 
allotted by the Constitution to agencies of legislative and 
executive action." 18 

These are only a selected few among the remarks that 
different Supreme Court justices have made in recent 
years about their own colleagues' decisions. As the gov- 
ernment gets bigger and the federal laws get longer, there 
is a tendency for government lawyers to acquire more 
power, particularly over businessmen, who are not much 
liked by the federal courts. 

There have been two recent dams against this growth 
of bureau and commission-lawyer power. One was a 
decision of the Supreme Court some 30 years ago, 19 on 
the powers of the Federal Trade Commission, which said 
"It is for the courts, not the Commission, ultimately to 
determine as a matter of law what they [the words "un- 
fair methods of competition"] include." The other was 
an Act passed by Congress in 1947, 20 the Administrative 
Procedure Act, in which Congress said that people on 
trial before a government department are entitled to a 
Court review of whether the government lawyers really 
have "substantial evidence" against them. 

But in case after case recently, the Supreme Court has 
been saying, in effect, that it will take the government 
lawyers' word for it. It has held, in effect, that Congress 
intended the courts to give a virtual rubber-stamp ap- 



THE SUPREME COURT REWRITES THE LAW 7 
proval to, as "experts," the government lawyers of the 
Federal Power Commission, 21 the Securities and Ex- 
change Commission, 22 and the Federal Trade Commis- 



sion. 23 



As a result it is lack of money rather than lack of power 
that holds back such government agencies from haling 
more businesses into court. "If we had the money," said 
a Federal Trade Commissioner recently, "we could get a 
'cease-and-desist' order against every businessman in the 
United States who is engaged in interstate commerce. 
The businessman has nothing to say. He can only hope 
the law of averages will keep him off the wrong end of a 
complaint." 24 

In recent decisions, the Supreme Court has carried this 
tendency to accept the word of government lawyers to 
an extraordinary degree. In the Morton Salt case, the 
majority decision inspired the minority to comment on 
"the almost absolute subservience of judicial judgment to 
administrative experience." And in the Cement Insti- 
tute case, 25 the Court in effect banned (or cast a heavy 
legal cloud over) the use, by heavy industry, of basing 
points for pricing purposes, despite the fact that Congress 
had explicitly refused to write any such ban into the law. 

Of this Cement Institute case the lower court said, "If 
this pricing system which Congress has over the years 
steadfastly refused to declare illegal ... is now to be 
outlawed by the courts, it will mark the high tide in 
judicial usurpation. . . . The basing point system has 
been in use by industry for almost half a century. . . . 
Congress has repeatedly refused to declare it illegal. . . . 
In our judgment the question . . . rests clearly within 
the legislative domain. . . ." 26 

But the Supreme Court thought differently. Or at 
least, most industry lawyers so concluded. But the 



8 THE SUPREME COURT REWRITES THE LAW 

Court's opinion ran to over ten thousand words and, to 
judge by the comment, it seems that "you could prove 
almost anything by it." 



2. Everybody Out of Step but 
the Government Lawyers 



The productive power of American industry is the 
eighth wonder of the world. It is the continual astonish- 
ment of Europe and the deterrent of Russia. The indus- 
trial powerhouse of the United States has developed a 
voltage and is now putting out a current of economic 
energy such as has never been known before in human 
history. 

It is hard to believe that all this industrial power, avail- 
able both for peace and for war, has been built on error 
and by criminals. When a young man shows great 
power in athletics or an old man holds together toward 
the century mark, people think there must have been 
something good in the makings of such a man. Not so, 
however, with American industry in the eyes of the 
federal courts and the government lawyers. It is full 
of original sin and needs to be taken apart and put to- 
gether properly. 

Moses had nothing on the Supreme Court. He handed 
down ten commandments. The Supreme Court is hand- 
ing down ten thousand. And like the ten that Moses 
brought down from Mount Sinai, they are nearly all 
"don'ts." 

The highest court of the land, of course, doesn't go 
into thousands of detailed "thou shalt not's." It merely 

9 



10 EVERYBODY OUT OF STEP 

decides one way or the other on each case that comes 
before it. But the Court's decisions these days are up- 
holding the hand of government officials and the hand of 
government officials is writing the ten thousand "don'ts" 
for American business and industry. The doctrine of 
original sin is now being applied to American business- 
men and official "naughty-naughties" are being turned 
out for it in the Federal Trade Commission and the Anti- 
trust Division of the Department of Justice by mass 
production. 

There's a "new look" in the antitrust laws these days 
and it deserves some attention from every American citi- 
zen who realizes that on American industry depends not 
only the comfort of his home, but its defense. 

The trouble isn't simply that almost every businessman 
in the United States could now, by the new rules, be 
haled into court by government officials and be fined, 
branded a criminal for the most commonplace and ac- 
cepted practices, and subjected to treble-damage suits by 
competitors and customers. It is that the policies and 
practices by which American business has grown so 
phenomenally productive have one and all in recent years 
been damned, discouraged, and suppressed. 

The current civil suit of the government lawyers 
against the Great Atlantic & Pacific Tea Company is a 
case in point. It is not, in effect, against the Hartford 
brothers who own the chain, but against their methods. 
The proposed breakup of the system would further en- 
rich the Hartfords. The real significance of the attack 
on A&P is that a victory by the Antitrust Division lawyers 
would mean the end of the high-volume, low-margin, 
hard-hitting, penny-saving methods that A&P pioneered. 

American industry has developed its muscles in a busi- 
ness community that daily operates with quantity dis- 



EVERYBODY OUT OF STEP 11 

counts, matched prices, freight absorption, horizontal and 
vertical integration, and the rapid-fire development of 
new, unheard-of products. Every one of these prac- 
tices, if not an outright crime under federal law, is now 
under a legal cloud. 

Take the matter of quantity discounts. Everybody 
knows them, at least in such forms as "Ten Cents Apiece: 
Three for a Quarter," "Cheaper by the Case," or, "I 
Can Get It for You Wholesale." Every householder 
can see on the back of his electric-light bill that the more 
electricity he buys, the cheaper he gets it per kilowatt- 
hour. If he ships freight he knows that the more he 
ships the less he pays per unit. 

But quantity discounts are now in the shadow. In the 
Morton Salt case, a dissenting Justice said, "The case, in 
a nutshell, is that no quantity discount is valid which the 
[Federal Trade] Commission sees fit to attack." And 
the FTC, itself, commented that this was a "very radical 
interpretation." 

Take the case of matched prices. Nobody is sur- 
prised if he finds that ninety-nine times out of 100 if 
he buys a can of orange juice or of smoking tobacco on 
one side of the street, and crosses the street, the price 
will be the same on the other side. When a merchant 
advertises "I will match any competitor's price," most 
people think well of him. Throughout American busi- 
ness, nearly everybody's price for the same thing is the 
same at any particular time. 

But the government lawyers have begun to look into 
this situation and now it's dangerous to match a com- 
petitor's price consistently. Legally, in federal anti- 
trust law, this can make one a conspirator, or something 
just as bad. "Identical pricing" has become highly 
dangerous. 



12 EVERYBODY OUT OF STEP 

For instance, in October 1948 the Federal Trade Com- 
mission, discussing a case that had come before it, laid 
out the following verbal booby trap for competitors: 

The Commission chose to rely on the obvious tact that 
the economic effect of identical prices, achieved through 
conscious parallel action, is the same as that of similar prices 
achieved through overt collusion; and for this reason the 
Commission treated the conscious parallelism of action 
as a violation of the Federal Trade Commission Act. 

The catch here lies in the fact that the matched prices 
of hard competition look superficially just like the 
matched prices of conspiracy. If three afternoon papers 
all charge the same nickel a copy, it might be because 
their managements all agreed, or it might be because 
their managements all disagreed. Similarly a still pic- 
ture of two or three cats looking at a piece of meat might 
look like a conspiracy, and it might take a good deal of 
waiting round with a movie camera to "prove" other- 
wise. But the burden of proof today is on private busi- 
ness, not on the FTC, and in antitrust law the old Anglo- 
Saxon rule that, if circumstantial evidence has an innocent 
as well as a guilty interpretation, the man goes free, has 
been talked away. 

This FTC statement contains another joker for Ameri- 
can business, in the phrase "conscious parallel action." 
This refers to the fact that it is now legally dangerous 
for American businessmen to know each others' price 
lists. It is generally assumed among businessmen that it 
is a good thing and a help to competition if everybody 
knows what everybody else is charging. Trade associa- 
tions publish these figures, including premiums, discounts, 
payment terms, and so on. So do trade journals. No- 
where in the world are the facts about who is charging 



EVERYBODY OUT OF STEP 13 

how much for what so well and widely known among 
competitors as in the United States. 

But this information, too, has come under suspicion. 
Government lawyers are against the general dissemina- 
tion of such news. The Antitrust Division had it stopped 
in the Sugar Institute case * and tried to force the Ameri- 
can Iron and Steel Institute to quit publishing rate-books 
for its members. 

Here the good of knowledge is in question. For com- 
petitors each to know what the other is doing and to be 
able to make quick estimates of what a cut or an increase 
means is to provide them a tool like a hatchet or a blow- 
torch that can be used both for good and for evil. They 
can use such information to soften competition, or to 
compete harder. Tropismatically suspicious, the govern- 
ment lawyers in the FTC and the Antitrust Division feel 
that businessmen will use such information to avoid com- 
peting. But by the same reasoning, of course, the com- 
mon use of the English language, the decimal system, 
and of the old English nomenclature of ounces, pounds, 
and tons also contributes to the possibilities of "conscious 
parallel action" by businessmen. 

Still another standard practice of American business- 
men is now legally dangerous. It is "uniform delivered 
pricing." Everybody knows it in such forms as 
"Twenty-five Cents Everywhere" or "One Dollar Every- 
where East of the Rockies" (zone pricing) . But this is 
now questionable under the Federal Trade Commission's 
new concept of "mill-net" pricing. 

The "mill-net" idea, which the Supreme Court appears 
to have confirmed 2 is that true "price," in the eyes of 
the law, is not what is charged, but what is received. 
Thus, for instance, a pair of gloves made in Gloversville, 
New York, and sold both in Gloversville and in Los 



14 EVERYBODY OUT OF STEP 

Angeles for three dollars, produces a different "mill-net" 
to the maker from the two places, by the amount of the 
freight charge. 

This is important because the Clayton Act of 1914 (as 
amended by the Robinson-Patman Act of 1936) prohibits 
"price discriminations," which means the charging of 
different prices for the same goods to different customers 
(except in certain circumstances, the extent of which 
the Courts have been shrinking) . But the Federal Trade 
Commission lawyers, with the "mill-net" interpretation, 
easily make it a violation of Federal law to charge the 
same price in Gloversville and in Los Angeles for the 
same pair of gloves. For it isn't, under the mill-net 
interpretation, the same price. Or, as the Supreme Court 
put it in the Cement case, the law "does not permit a 
seller to use a sales system which constantly results in his 
getting more money for like goods from some customers 
than from others." 

This is practically a death-sentence anytime the FTC 
lawyers want to use it, for uniform delivered pricing, 
zone pricing, basing-point pricing, or any kind of freight 
absorption or phantom freight. 

Thus for instance if this book is sold at the same price 
in Kansas City as in Jersey City, the publisher may be, 
by the now legally accepted "mill-net" theory, "using 
a sales system which constantly results in his getting more 
money for like goods from some customers than from 
others." (For, in some instances he may pay the freight; 
and, unfortunately, this is probably heavy reading.) 

Another common practice of American businessmen 
is now in legal jeopardy, the "good faith" matching of 
competitors' price cuts. Under the law, as it was gener- 
ally taken for granted until recently, a firm could at least 
cut its price to match a competitor's price reduction. 



EVERYBODY OUT OF STEP 15 

Such a cut would be made in "good faith competition,' ' 
supposedly protected by Section 2(b) of the amended 
Clayton Act. But in a major case to be described in 
Chapter 5, the Federal Trade Commission tried to de- 
stroy this kind of legal defense against a charge of 
illegal price discrimination. The accused Standard Oil 
Company of Indiana told the Circuit Court, on ap- 
peal, that the lower court's decision would "necessitate 
nation-wide reconstruction of marketing procedures." 
But the Circuit Court upheld. 

Another common form of business is now apparently 
outlawed, through the recent decision of the Supreme 
Court in the Standard Oil Company of California case 
involving exclusive dealer contracts, which the company 
held with some 7,000 gasoline retailers. Such arrange- 
ments have been a standard feature of American busi- 
ness. The Court's 5-4 decision thus not only outlawed 
the 7,000 California contracts, and probably many thou- 
sands more with other oil companies, but also made them 
hazardous in the distribution of many other products, 
like automobiles, farm machinery, hardware, and so on. 

A natural alternative which manufacturers might 
choose for such contracts would be to go into the retail- 
ing business themselves, perhaps taking on these now 
independent dealers as employees instead of dealing with 
them on contract. This, however, is a form of "vertical 
integration." And the face of the federal antitrust laws 
is being steadily hardened against industrial integration. 
The Antitrust Division has repeatedly claimed that ver- 
tical integration is in itself ("per se") a crime under the 
Sherman Antitrust Act. A near majority of the Su- 
preme Court was willing, a few years ago, to accept 
this view. 

These are not all the common practices of American 



16 EVERYBODY OUT OF STEP 

business which are now legally questionable, if not out- 
right criminal. Sales managers may yet run afoul of the 
government lawyers even if they (a) can completely 
justify quantity discounts by cost-accounting; (b) do 
not sell at the same price as competitors; (c) do not know 
competitors' prices; (d) never "absorb" any freight costs 
in their offering prices; (e) make no exclusive contracts; 
and (f) do not work for integrated firms. The new 
powers given the FTC and the Antitrust Division threaten 
new hazards, even in methods taken to avoid the present 
ones. 

As the law is now interpreted, the Acting Chairman 
of the Federal Trade Commission felt able to tell a 
Senate investigating committee recently that "under . . . 
these . . . decisions it is safe to say that we can take 
orders against 100,000 businessmen." 3 

One of the hazards that sales managers must now take 
into account is that some policy followed today in the 
light of the best legal opinion may next year be re- 
interpreted as illegal. In such case the crime and the 
penalty may be retroactive. This is as though an auto- 
mobile driver who took a right turn on a red light during 
a month in which this was permitted by current traffic 
regulations, were subsequently found guilty for it because 
it was later ruled to be illegal. This, however, is in the 
"Nothing Can Be Done About It" Department, as many 
company officials have learned. 

Another kind of hazard consists in the possibility of 
treble damage suits, also possibly retroactive. Firms 
which, with the best of intentions, run afoul of the law 
on one of the above counts, are open to treble damage 
suits under the antitrust laws, even though their offense 
was a course of conduct that everyone considered, at 
the time, quite legal as well as ethical, but that a subse- 



EVERYBODY OUT OF STEP 17 

quent reinterpretation of the law found to be illegal. 

A saving grace in the law is its human side. This came 
out in Senate Committee hearings some years ago. The 
then Assistant Attorney-General Wendell Berge was on 
the stand and the transcript read as follows. 4 

Chairman (Senator hanger): How many men have you 
put in the penitentiary as a result of prosecutions under the 
Sherman Act? 

Mr. Berge: None for a generation. 

Chairman: I want to know why. 

Mr. Berge: I have no trouble answering the question. . . . 
Frankly, we have to recognize that the community does not 
regard the antitrust violation as a moral violation in the same 
sense that they would regard embezzlement. 

Chairman: Who says that? 

Mr. Berge: The courts and the juries. . . . Our problem, 
sir, in criminal cases is to get convictions of businessmen who 
in the morals and traditions of the community are not 
criminals. 



3- The Argument over 

Whether There Is an 

Argument 



From where a newspaperman sits, there seems to be 
considerable confusion over the meaning of the antitrust 
laws as now interpreted. For instance the recent Cement 
Institute case, 1 which was largely about whether cement 
companies could legally pay the freight for distant cus- 
tomers, said at one place, about two previous Supreme 
Court decisions, "Thus the combined effect of the two 
cases was to forbid the adoption for sales purposes of 
any basing-point pricing system." And right after the 
decision, the Federal Trade Commission put out a press 
release which was headed, "Court Holds Basing-Point 
Adethods of Pricing to be Unfair Irrespective of Con- 
spiracy." 

From this, one might pardonably assume that the Su- 
preme Court had held the use of basing-point pricing 
systems of methods of pricing to be illegal. 

However, it turned out to be not quite so simple. 

They were — but they weren't. Illegal, that is. 

Another reason why one might assume that the use of 
basing-point pricing was rendered illegal by the Cement 
Institute decision was that the FTC was the winner in 
the case, and the FTC had been haranguing Congress for 



THE ARGUMENT 19 

ten years before the Cement decision to outlaw basing- 
point pricing. FTC Commissioner Robert Free had ad- 
vocated before the Temporary National Economic 
Committee (TNEC) a "specific ban by statute" on 
basing-point pricing so as to "avoid the delay, expense, 
and uncertainty of protracted and expensive litigation in 
each individual case." 

However, the FTC shortly after the Cement case began 
to sing another tune. It was that basing-point pricing 
might be legal some times, and illegal other times, and 
that nobody could tell beforehand, except the FTC. 

The Commission put out a 4,500-word "explanation" 
of its attitude, which said that basing-point pricing was 
not in itself illegal. By this time a Senate Committee 
had started hearings to straighten the matter out. FTC 
lawyers testified. But their testimony did not agree. 
One said such pricing systems were not illegal in them- 
selves. Another said that only f.o.b. mill pricing was 
really safe. A third said that the safest thing for a manu- 
facturer to do was to remain ignorant of his competitors' 
prices (thus avoiding "conscious parallel action"). 

Senator Capehart, who conducted the hearings, said 
(October, 1948) that "Confusion inside the FTC is just 
as great as outside it. We had the commission's six top 
lawyers before us in executive session. I asked them 
about two proposed selling methods that had been con- 
demned by the commission and the courts, and they said 
that so far as they knew they were all right." 

Within the next few months, FTC Commissioner 
Mason said explicitly that "Freight absorption is out the 
window," and another Commissioner, Freer, said ex- 
plicitly in December that freight absorption "is not out 
the window." 

Senator Capehart 's successor on the Committee, Sen- 



20 THE ARGUMENT 

ator Johnson, told the Senate (January 5, 1949) that 
"not only are businessmen confused, but that members 
of the Federal Trade Commission and its staff are in 
complete disagreement as to when a seller may pay or 
absorb transportation costs." Commissioner Mason 
ridiculed the majority of the Commission, saying that the 
"agencies of government dealing with the problems of 
business conduct have created a Tower of Babel." 2 

Again in 1950 Mr. Mason made the same charge. 
Speaking at Marquette University on April 11, 1950 he 
said: 

... I openly defy the entire University to explain to any 
businessman what he can or cannot legally do when making 
up his next season's price policy. 

Can he absorb freight? Perhaps, if he only does it now 
and then, or if he is not too big, or if the amount of the 
freight is not too much. But who is to say? How often is 
'now and then'? What size is 'too big'? And how much is 
'too much'? 

What a young law student needs most after a diploma 
and a shingle and a client is a good pair of eyebrows and 
broad shoulders. Then when his client asks him how to 
stay out of trouble with the government, he can raise the 
first and shrug the second . . . 

This kind of uncertainty has come to be a frequent 
result of Supreme Court decisions. Thus, in the South- 
east Underwriters case Justice Roberts remarked that 
"It is regrettable that in an era marked by doubt and 
confusion . . . this Court, which has been looked to as 
exhibiting consistency . . . should now itself be- 
come the breeder of fresh doubt and confusion in the 
public mind. . . . With these frequent reversals . . . 
the law becomes not a charge to govern conduct, but a 
game of chance . . . instead of settling rights and liabili- 
ties, it unsettles them ..." 



THE ARGUMENT 21 

Adding to the uncertainty, the Supreme Court, it has 
been estimated, reversed earlier decisions in 30 cases be- 
tween 1937 and 1949, and in three years to the middle 
of 1949 had handed down 86 five-to-four decisions. 

If the Court itself finds it so hard to agree, it is natural 
that businessmen find it hard to know what the law is 
or will be. Five-to-four decisions mean that one Justice 
casts the determining vote in what may be a major case. 
An example of this was the Standard of California case 
cited in Chapter 2. The decision of one Justice meant 
that the contracts of at least 20,000 dealers may be illegal 
and their relations with their suppliers may have to be 
rearranged. 

However, many people feel that this uncertainty is 
rather a good thing. Thus, for instance, Justice Douglas 
has recently said that 3 "the law will always teem with 
uncertainty . . . under the democratic scheme of things. 
. . . Philosophers of the democratic faith will rejoice 
in the uncertainty of the law and find strength and glory 



in it." 



Federal Trade Commission officials have repeatedly 
said the same. Thus its Chief Economist, Dr. Corwin 
D. Edwards, has said, "If the statute contained a series 
of specific prohibitions of particular practices and of 
agreements about particular subjects, the ingenuity of 
business men would soon devise new ways of accomplish- 
ing restrictive ends. . . ." 4 And the late Associate 
General Counsel of the Commission, Mr. Walter B. 
Wooden, told a Senate Committee that Congress "could 
not expect to keep its precise definitions abreast of the 
inventiveness of the human mind in devising new forms 
of restraint on competition." 5 And FTC Commissioner 
Robert E. Freer, opposing clarification of the law on the 
basing-point question, said that "the real question" is 



22 THE ARGUMENT 

"whether the FTC and the courts are to remain free to 
examine the facts in each individual case and ascertain 
whether particular pricing systems have . . . had the 
effect of injuring or suppressing competition." 6 

The Department of Justice seems also to take the view 
that the law should not be too specific. Thus Attorney- 
General Howard McGrath has been quoted as follows 
in a press interview: 

Question: Then doesn't it all boil down to one thing — 
shouldn't there be developed a set of standards by which a 
businessman would know whether he was violating the anti- 
trust laws? 

Answer: I would think it would be a disadvantage to 
businessmen generally if we tried to write hard and fast 
rules. I do agree there should be a general understanding 
of what the law means and we have that stated in the 
law. . . . 

I don't think it would be desirable to try to put down a 
specific code. I just don't think that you can develop a 
body of antitrust laws adequate to the country's need that 
way. Business practices are constantly changing and the 
generality of the laws makes them adaptable to new and 
different circumstances . . . 7 

And the Chairman of the House Judiciary Committee, 
Emanuel Celler, has echoed this view, saying: 

I want to make it clear that I would vigorously oppose 
any antitrust laws that attempted to particularize violations, 
giving bills of particulars to replace general principles. The 
law must remain fluid, allowing for a dynamic society. 
Otherwise, to put it bluntly, the process would become a 
rat-race between the monopolist seizing upon omissions and 
the Congress trying to fill them into the law, always eighteen 
steps behind . . . 8 

Some noted men have not shared these views. Thus 
the Viennese economist, Dr. Friedrich Hayek, in his 
book, The Road to Serfdom, recently wrote: 



THE ARGUMENT 21 

Nothing distinguishes more clearly conditions in a free 
country from those in a country under arbitrary govern- 
ment than the observance in the former of the great principles 
known as the Rule of Law . . . that government in all its 
actions is bound by rules fixed and announced beforehand. 9 

And a great American lawyer once said, "Clean-cut 
and specific rules make it possible for men to accomplish 
in their business dealings the legal results they intend 
without the necessity of constant recourse to the courts 
to resolve doubts." 10 

In fact, President Woodrow Wilson, the father of the 
Federal Trade Commission Act itself, when he first pro- 
posed the idea to Congress, said, 

The business of the country awaits also, has long awaited 
and has suffered because it could not obtain further and 
more explicit legislative definition of the policy and meaning 
of the existing antitrust law. 

Nothing hampers business like uncertainty. Nothing 
daunts or discourages it like the necessity to take chances, 
to run the risk of falling under the condemnation of the law 
before it can make sure just what the law is. 

Surely we are sufficiently familiar with the actual proc- 
esses and methods of monopoly and of the many hurtful 
restraints of trade, to make definition possible, at any rate up 
to the limits of what experience has disclosed. 11 

The British have been going through somewhat the 
same problem. A recent Act of Parliament (Monopo- 
lies and Restrictive Practices Act, 1 1 and 1 2 George VI, 
c.66 (1948) was so vague that the London Economist 
remarked that "some principles of economic justice 
should be drawn up so that businessmen may have an 
idea, as precise as may be, of what they may do and 
what not, and so that the enforcing authorities may have 
something other than their own prejudices to guide 
them." 12 



24 THE ARGUMENT 

In fact the British went through somewhat the 
same controversy three hundred years ago, in the days 
of the Commonwealth. The contestants were the same 
— the Crown (the government) and the Parliament (the 
congress) . The issue was the same — whether the Crown 
should be governed by specific rules of law or should 
be free-wheeling in its actions. Men of the Massachu- 
setts Bay Colony went back to England to join issue, 
and when the controversy was finally decided with the 
Whig "Revolution" of 1688, in favor of the rule of law 
and a limited monarchy, Britain embarked on her two 
greatest centuries of achievement. 

However, the new antitrust law interpretations now 
have come to mean not only confusion, but straight- 
out contradictions. 

Some of these contradictions are obvious, as in the 
"Detroit gasoline case" (to be discussed in Chapter 5). 
In this the FTC, to prevent "price discrimination," re- 
quired resale-price-maintenance. Others are more pro- 
found, though less immediately apparent, as in the 
(apparent) ban on basing-point pricing. This tends to 
Balkanize trade or to build up local monopolies — which 
the Antitrust Division will then have to attack; or in 
the Supreme Court's requirement of functional discounts 
in the Morton Salt case (next chapter) which will drive 
business toward vertical integration, which the Antitrust 
Division is opposed to. But the main contradiction is a 
broad one. The antitrust laws are now being used to 
force both "hard competition" and "soft competition." 
The collision (with businessmen caught in between) will 
be discussed in Chapter 6. 



4- The Morton Salt Case" 



In 1914 President Wilson urged Congress to pass some 
improvements in the antitrust laws. He wanted some- 
thing clearer than the Sherman Act of 1890. Congress 
agreed and passed both the Clayton Antitrust Act and 
the Federal Trade Commission Act. Business people 
wanted something more definite about what kinds of 
competition were fair and what were not and, also, some- 
body to administer such a law. The Sherman Act was 
too broad a charter. 2 When a firm cut prices, for in- 
stance, it was hard to say whether this was fair or unfair 
competition, or in fact, whether it actually contributed 
to competition or detracted from it. 

In the Clayton Act, Congress tackled for the first time 
the paradox in the system of free competition. That 
paradox is that when businessmen are completely free to 
compete, some get put out of business. So it looks like a 
poker game in which so many players may get wiped 
out that it may narrow down to no game at all. 

The strength of the Clayton Act lay in Section 2, 
which said in part, "It shall be unlawful ... to dis- 
criminate in price between different purchasers . . . 
where the effect . . . may be substantially to lessen com- 
petition or tend to create a monopoly in any line of 
commerce . . ." To "discriminate in price between 
different purchasers" means merely to charge them differ- 
ent prices for the same goods. 

25 



26 THE MORTON SALT CASE 

If the law, however, had stopped here, it might have 
called in question nearly ail quantity discounts. Quan- 
tity discounts have long been a fundamental part of 
American business operations. Every housewife knows 
them in such forms as "One package, 10 cents; three 
packages, 25 cents." Virtually every business quotes 
them. Railroads use them in complicated form. Per- 
haps their most conspicuous use is by the electric power 
companies, whose rates vary as much as from ten cents 
a kilowatt-hour down to a third of a cent, depending on 
the quantity taken. 

So Congress put a proviso in the Act which said "that 
nothing herein contained shall prevent discrimination in 
price ... on account of differences in the grade, quality, 
or quantity of the commodity sold ..." 

The law so stood until 1936, with this blanket exemp- 
tion of quantity discounts. But in the 1930's, two de- 
velopments began to close in on this exemption. For 
one, the mail-order and chain stores began to blow a 
strong wind of new methods through the traditional 
methods of wholesale and retail distribution. They not 
only cut down retail selling margins, but also — through 
quantity buying and selling, among other methods — 
often by-passed wholesalers and were able to undersell 
independent retailers. 

The other influence was the depression. The country 
became less interested in "hard competition" and wanted 
to get prices up, not down. With the National Indus- 
trial Recovery Act, Congress tried to support prices and 
protect competitors. And when NRA was struck down 
by the old Supreme Court, its spirit lingered on. 

Organized associations of wholesalers, jobbers, and 
independent retailers began pushing various kinds of laws 
to stop the price cutting and to protect their margins. 



THE MORTON SALT CASE 27 

Among these were state laws requiring minimum markups 
and prohibiting the use of "loss-leaders." One of the 
chief drives was for punitive state taxes on the large 
chains, aimed chiefly at the grocery chains. 

It was almost inevitable, in the circumstances, that 
quantity discounts should come under fire. The first 
notable attack on them came from the Federal Trade 
Commission. It sued the Goodyear Tire and Rubber 
Company for its large sales, at substantial quantity dis- 
counts, to Sears, Roebuck Company. It argued that these 
discounts were illegal because the Goodyear people had 
not justified them on the basis of savings in cost. 3 But 
the Circuit Court threw this out on the ground that the 
quantity discount proviso in the Clayton Act did not 
require a cost-saving defense. 4 

Meantime, however, Congress sharply amended the 
Clayton Act in 1936, by passing the Robinson-Patman 
Act. It put into the law what the FTC had tried to 
enforce in the courts against Goodyear. It changed the 
quantity-discount proviso to read: ". . . that nothing 
herein contained shall prevent differentials which make 
only due allowance for differences in the cost of manu- 
facture, sale or delivery resulting from . . . differing 
methods or quantities ..." 

This meant that quantity discounts would be illegal if, 
in effect, they hurt competition, unless they could be 
justified on cost savings. But this is a vastly oversimpli- 
fied statement of the meaning as we shall see. 

It was some time before the change got a thorough 
test in the courts. But in 1940 the Federal Trade Com- 
mission filed a complaint against the Morton Salt Com- 
pany for certain quantity discounts. When the company 
resisted, the slow machinery of the law finally produced 
a Supreme Court decision on May 3, 1948. 



28 THE MORTON SALT CASE 

This decision was so sharp and drastic that it went 
through the ranks of the antitrust lawyers almost like an 
earthquake. Even the FTC lawyers called it a "very 
radical interpretation of the law" and the Commission 
went so far, after reading the decision, as to say that it 
would not use all the powers it got from it. 

The Morton Salt Company sold its top brand of table 
salt, called "Blue Label," on a standard quantity discount 
system. It prices per case (after allowances for rebates 
and discounts) were as follows: 

Less-than-carload purchases $1.60 

Carload purchases 1.50 

5,000-case purchases in any consecutive 12 months . . 1.40 

50,000-case purchases in any consecutive 12 months 1.35 

The two discounts here chiefly under fire were at 
the top and bottom. Less than one per cent of Morton's 
customers were so small they bought in less-than-carload 
lots, but the Court took them particularly into account. 
On the other hand the Court noted that "only five com- 
panies have ever bought sufficient to obtain the $1.35 
per case price. These companies could buy in such 
quantities because they operate large chains of retail stores 
in various parts of the country." (They were American 
Stores Company, National Tea Company, Kroger, Safe- 
way, and A&P.) 

The Morton Salt people had tried to show cost-savings 
to the FTC, in the original hearings, to justify these dis- 
counts. To most businessmen these discounts, including 
even the 2 5 -cent lower price received by the big chains 
below the price to the scattering of less-than-carload 
buyers [15 cents or 10 per cent below the carload buy- 
ers] would seem easily justified on the lower costs of 
selling, billing, and so on. But the Commission ruled 
out this defense at the start as inadequate. So the ques- 



THE MORTON SALT CASE 29 

tion did not come up before the Supreme Court. (We 
shall consider later in this chapter the difficulties in the 
task of proving cost-savings to the FTC's satisfaction.) 

Thus the main argument before the Supreme Court 
was whether Morton's discounts "had in fact caused in- 
jury to competition." That is, had they run afoul of 
the clause "... where the effect . . . may be substan- 
tially to lessen competition ... or to injure, destroy, 
or prevent competition ..." 

The Supreme Court used to have the custom, when in 
doubt about the meaning of a law, to examine what was 
said in Congress about it during its passage. 

The "new" Supreme Court, as told in previous chap- 
ters, has often departed from this custom. Thus when 
it apparently banned the use of basing-point pricing in 
the Cement case, it read back into the law what Congress 
had read out of it. But in the Morton Salt case the Court 
went right back to the Congressional record on the 
Robinson-Patman Act. And here it pointed out not 
only what a radical change the law made but also added 
its own "very radical interpretation." 

The Court maintained: the legislative history of the 
Robinson-Patman Act makes it abundantly clear that Con- 
gress considered it to be an evil that a large buyer could 
secure a competetive advantage over a small buyer solely 
because of the large buyer's quantity purchasing ability . . . 
(it) was especially concerned with protecting small busi- 
nesses which were unable to buy in quantities, such as the 
merchants here who purchased in less-than-carload lots. 
The new provision . . . was intended to justify a finding of 
injury to competition by a showing of "injury to the com- 
petitor [author's italics] victimized by the discrimination." 

The Court quoted the above from the report of the 
Senate Judiciary Committee on the Robinson-Patman bill 
and in a footnote it gave a longer quotation. The Com- 



30 THE MORTON SALT CASE 

mittee said that the Clayton Act had previously been "in 
practice . . . too restrictive [on the FTC — ed.] in re- 
quiring a showing of general injury to competitive con- 
ditions . . . whereas the more immediately important 
concern is in injury to the competitor [author's italics]. 
. . . Only through such injuries, in fact, can the larger 
general injury result, and to catch the weed in the seed 
will keep it from coming to flower." 5 

Then the Court said, "We think that the language 
of the Act, and the legislative history just cited, show 
that Congress meant . . . that in a case involving com- 
petitive injury between a seller's customers the Commis- 
sion need only prove that a seller had charged one 
purchaser a higher price for like goods than he had 
charged one or more of the purchaser's competitors." 

But the finding that really jolted the lawyers of both 
sides was that the law "does not require that the dis- 
criminations must in fact have harmed competition, but 
only that there is a reasonable possibility that they 'may' 
have such an effect . . . The Commission is author- 
ized by the Act to bar discriminatory prices upon the 
'reasonable possibility' that different prices for like goods 
to competing purchasers may have the defined effect on 
competition." 

These three statements, put together, seem to add up 
as follows; that a quantity discount is illegal if there is 
a reasonable possibility that it has hurt a competitor. 
Now it was this little word "possibility" that astonished 
the lawyers because most had assumed that the law re- 
quired a reasonable "probability." And there is a vast 
difference between "possibility" and "probability" in 
both common sense and in law. 

Thus if a man drives off in his car, there is a reason- 
able possibility that he may have an accident — but (if he 



THE MORTON SALT CASE 3t 

is a good driver) no reasonable probability. Most people 
would agree that if there were a reasonable probability 
of his doing damage, his license ought to be revoked. 
But if drivers' licenses were granted only to drivers who 
could prove there was no reasonable possibility of their 
hitting anybody, the roads would be empty. 
Said Justice Jackson, dissenting, 

While I agree with much of the Court's opinion ... I 
cannot accept its most significant feature, which is a new 
interpretation . . . that will sanction prohibition of any 
discounts "if there is a reasonable possibility that they 'may' 
have the effect to wit: to lessen, injure, destroy or prevent 
competition ... I think the law as written by the Congress 
and as always interpreted by this Court requires that the 
record show a reasonable probability of that effect . . . 
The law rarely authorizes judgments on proof of mere 
possibilities. . . . This Court has, at least three times and 
as late as 1945, refused to interpret these laws as doing so 
... I know of no other instance in which this Court has 
ever held that administrative orders applying drastic regula- 
tion of business practices may hang on so slender a thread 
of evidence . . . 

But the Supreme Court in the Morton Salt case made 
one more important decision which the lawyers are just 
beginning to discuss. It concerned "functional dis- 
counts." A "functional discount" is one that a buyer 
gets because he is a "wholesaler," a "jobber," or a "re- 
tailer." It does not concern quantities. In fact it tends 
to cross up quantities. Thus a chain buying 50,000 cases 
a year would be entitled (on a quantity discount basis) 
to a far higher discount than what most wholesalers or 
jobbers get, let alone independent retailers; but on a 
functional discount basis it would, since it is a retailer, 
have to pay more than the wholesaler or jobber (who 
bought in smaller quantities) unless of course its supplier 
could prove a cost-saving to the FTC. 



32 THE MORTON SALT CASE 

Congress did not require functional pricing in the 
Robinson-Patman Act. But in the Morton Salt case the 
Supreme Court seems to have done so. Thus it said, 
"Theoretically, these discounts are equally available to 
all, but functionally they are not." And it approved 
those parts of the FTC order which "would absolutely 
bar (Morton) from selling its table salt, regardless of 
quantities, to some wholesalers and retailers at prices dif- 
ferent from that which it charged competing wholesalers 
and retailers for the same grade of salt." 

And it upheld the order which forbade Morton's 
". . . selling ... to any retailer at prices lower than . . . 
charged wholesalers whose customers compete with such 
retailer." 

Whether or not the Supreme Court stretched the 
meaning of the Robinson-Patman Act here, the consumer 
seems like the goat. He is mentioned only once in the 
whole decision and there only by implication. That is 
where the Court criticized the fact that Morton's dis- 
counts "did result in price differentials between compet- 
ing purchasers sufficient to influence their resale price of 
salt . . ." That means that the discounts were partly 
handed on to customers. 

Why Morton Salt couldn't satisfy the FTC on the 
cost-saving of large orders may be partly explained by 
the following remarks of a well-known certified public 
accountant, formerly associated with the FTC. 

... It is in the distribution functions where most cost 
differences may be found . . . Distribution cost accounting 
is . . . still in its pioneering and experimental stages ... a 
number of cost reports . . . have been rejected by the 
Commission for the reason that the costs had not been 
properly developed . . . 

Measuring factors such as salesmen's calls, number of 



THE MORTON SALT CASE 33 

orders, numbers of invoices, number of invoice lines, etc., 
are often used . . . 

The cost defense advanced in the Morton Salt case is a 
splendid example of the results of mere office calcula- 
tions. . . . The FTC will not accept costs based largely 
upon unsupported estimates. . . . To try to make a survey 
of costs all over the country in the case of nation-wide 
distribution is an enormous task . . . 6 



5*. The Forgotten Consumer 



Long before World War I, when the Sherman Anti- 
trust Act was in its infancy, a group of retail lumber 
dealers were angered by a number of wholesale lumber 
men. The wholesale firms were edging into the retail 
business and they were not respecting the usual retail 
markup. In other words, they were cutting prices. 
The retailers, however, felt that they had a fair and 
proper place in the business, including markup, and that 
it should be protected. 

At about the same time a leading patent medicine com- 
pany, Dr. Miles, fell out with some of its distributors. 
They were not maintaining the retail price of Dr. Miles' 
medicine as the makers wanted them to. 

The Supreme Court had little difficulty in striking 
down both of these efforts at what is now called "resale 
price maintenance." If distributors wanted to cut prices 
below the customary margins, that was all right with 
the court. It was a form of competition, and it benefited 
the consumer. 1 

Much more recently the Supreme Court made a similar 
finding in the Ethyl Gasoline case. 2 It found that Ethyl 
violated the Sherman Act when it refused "to grant 
licenses to jobbers who cut prices or refused to conform 
to the marketing policies and posted prices of the major 
refineries or market leaders among them." In other 
words, it here again struck down resale price maintenance. 

34 



THE FORGOTTEN CONSUMER 35 

These were Sherman Act cases. But recently, the 
Federal Trade Commission found resale price main- 
tenance to be a violation also, of the FTC Act, as an "un- 
fair method of competition." 3 

Times have changed. And in an astonishing recent 
case — the so-called "Detroit gasoline case" — the FTC 
reversed itself, in effect, and required a big oil company 
practically to enforce resale price maintenance on certain 
of its jobber-retailer customers. What happened in the 
case was this. 

The Standard Oil Company of Indiana had in Detroit 
what is called a "dual distribution system." In other 
words, it sold, on the one hand, direct to several hundred 
retail gas stations; and on the other hand to four jobbers, 
some of whom not only sold to retailers but also sold 
at retail, that is, direct to consumers, through the jobbers' 
own gasoline stations. 

Standard sold to the jobbers at 1 1 / 2 cents a gallon lower 
than it sold to retail station-operators. This was a tank- 
car price to the jobbers, and a tznk-uoagon price to the 
retailers. This was not a wide spread. In fact a number 
of oil companies had been fined a few years earlier under 
the Sherman Act for holding the jobber-retailer spread 
at two cents. 4 

One of these jobbers, however, selling at retail through 
its own service stations, often passed on some of this dis- 
count to the drive-in customers, during some of the re- 
peated price battles that raged in the Detroit gasoline 
business. And this tended to aggravate the competitive 
battle, pull down retail prices to the consumer, and hurt 
some of this jobber-retailer's competitors. 

The FTC thereupon ordered the Indiana Standard 
company, among other things, "to cease dealing with 
any wholesaler who fit] knows, or should know, will 



36 THE FORGOTTEN CONSUMER 

not maintain [its] price to retailers." And the Circuit 
Court of Appeals upheld the FTC in this, saying that 
Standard might, "under the right to choose its customers, 
refuse to sell to wholesalers who sell to retailers below 
the price [it] makes to its own retailers." 5 

By odd coincidence a somewhat similar case was tried 
in Milwaukee at about the same time, also involving 
gasoline prices, but with a quite opposite outcome. Bear 
in mind that it was Detroit gasoline dealers who set off 
the above case and precipitated this FTC price main- 
tenance ruling. But meantime the State of Wisconsin 
was winning a case against price maintenance in Mil- 
waukee. The Milwaukee Retail Gasoline Dealers' Asso- 
ciation had sent bulletins to its members suggesting resale 
prices, which were adhered to by more than 90 per cent 
of its members, while only 55 per cent of the nonmember 
dealers to whom these bulletins were sent, maintained 
the suggested price. The Wisconsin court found the 
Association to have conspired to maintain gasoline prices, 
fined it $2,000, and ordered its charter dissolved. 6 

The Wisconsin proceeding was brought under a state 
antitrust law. This law and the action taken under it 
were in line with the original spirit of the federal antitrust 
laws. But a remarkable change has taken place in the 
interpretation of the federal laws, even though on Janu- 
ary 8, 1951, the Supreme Court reversed the Circuit 
Court in this case. 

Thus Federal Trade Commissioner Lowell B. Mason 
recently said: 

I remember back in 1936 when the Department of Justice 
decided to stop restraints of trade in the distribution of sugar. 
The courts agreed with the Attorney-General's contention, 
and in Sugar Institute v. United States (297 U.S.553) 
condemned the practices of the Sugar Code as a compendium 



THE FORGOTTEN CONSUMER 37 

of nearly every aspect of systematic restraint of trade that 
there was. 

I am sure the Attorney-General will not take offense if 
I tell him that we (in the Commission) do not care whether 
he won the Sugar Institute case in the Supreme Court or not, 
because three months after his department obtained this 
signal victory over the sugar trust, Congress [in the 
Robinson-Patman Act — ed] gave us the power to protect 
not competition but competitors, and now the Federal Trade 
Commission can enforce the very thing the Sugar Institute 
code was condemned for doing. . . J 

And the President's Council of Economic Advisers 
said in its 1948 report: "The philosophy of the Sherman 
Act appears to be yielding to a policy of 'ethical com- 
petition' which does not differentiate between the sta- 
bility of the individual firm and the stability of the total 
economy." And it went on to quote favorably President 
Woodrow Wilson's statement to the effect that he took 
off his hat to the businessman who by selling more at 
lower prices and by improving the quality of his product 
was able to take business away from his competitors. 
They observed that although warm admiration is often 
expressed for the policy of the Sherman Act, one excep- 
tion to the antitrust laws after another has been enacted 
in recent years, notably the Robinson-Patman Act and the 
Miller-Tydings Act to permit resale price maintenance of 
certain branded products. 

One of the most direct ways in which the old spirit 
of the Sherman Act is being changed is through the 
increasing enforcement of the "functional discount," by 
both the FTC and (as in the Morton Salt case) by the 
courts. A functional discount is one given by a manu- 
facturer to a buyer, because of the latter 's "function" in 
the distributive scheme. It is little more than resale price 
maintenance by another name. In effect, it freezes into 



38 THE FORGOTTEN CONSUMER 

the distribution system the traditional markups, from 
manufacturer, through wholesaler and retailer, to con- 
sumer. Thus, if the final consumer is expected to get a 
thing for a dollar, the wholesaler may get it for 60 cents 
and the retailer for 80 cents. By freezing-in their mark- 
ups, the discount tends to freeze these people into the 
distribution system. 

Around such traditional discount practices the FTC 
has been, for some time, weaving a gossamer of restric- 
tions to prevent them from being pared, reduced, or 
eliminated and the reduction being passed on to the 
consumer. Thus it has become legally dangerous to 
grant a discount to wholesalers so low that, as in the 
Detroit case, they can resell to retailers below one's own 
price to retailers. In this case, it was the retailers who 
were being protected. On the other hand the Morton 
salt decision made it dangerous to sell even to the most 
lush large retail account like that of a chain at a price 
which disregards the traditional difference between prices 
to wholesalers and those to retailers. In this case it was 
both the wholesalers and the small retailers who were 
being protected. Any price schedule today which can 
injure these two categories may now, by court-supported 
FTC finding, prove illegal on the ground that it "lessens" 
or "injures" competition. 

The net effect is to preserve the wholesaler in his 
wholesaling and the retailer in his retailing. More than 
that, it keeps them from invading each others' territory. 
Most important of all, it retards the cost-cutting expan- 
sion of chains, mail-order houses, and other dual-function 
and multiple-function firms. Thus it tends to preserve 
what might be called a caste system in distribution, with 
each traditional function assigned a place and a markup. 
This new interpretation seems to steer toward the in- 



THE FORGOTTEN CONSUMER 39 

elusion of various traditional classes of distributors in a 
new "welfare state" form of security. 

In its concern for these functional markups, the Trade 
Commission goes even beyond the letter of the Robinson- 
Patman Act, though perhaps not beyond the spirit. 
The Robinson-Patman Act does not require them, ex- 
cept by implication in the case of brokerage fees. But 
the FTC is coming to require them. And, significantly, 
the Commission has picked, of two going definitions of 
functional markup, the one most likely to protect the in- 
efficient or obsolescent middleman. For by one defini- 
tion, the functional discount is based on the service per- 
formed by the middleman, such as storing, re-packing, 
keeping books, extending credit, and so on. But the 
Commission has chosen the second definition, in which 
the discount is given according to the middleman's tradi- 
tional role — wholesaler, jobber, retailer — regardless of 
how comparatively useful he remains in the distributive 
scheme of things. 

This can result in what might be called "phantom" 
markups, in which the buyer has to pay a price which 
includes a markup for the intermediate middleman even 
though there isn't any intermediate handler. This came 
out in the Morton Salt case, in which it appears that the 
company was ordered to quote prices to all retailers, big 
or small, as retailers. In such case the big chains, who 
do for themselves the equivalent of the wholesaling func- 
tion, would nevertheless have to pay a price for their 
salt which would include a charge for the wholesaler. 
The manufacturer will thus be collecting a phantom dis- 
count from such big buyers, since he will be in effect 
charging a price which includes the services of a whole- 
saler, though the buyer performs these services himself. 

In recent years the Federal Trade Commission has been 



40 THE FORGOTTEN CONSUMER 

paying more and more attention to costs. It seems to 
be moving toward a sort of cost-plus principle of pricing. 
This has begun to take shape in at least three major cases 
already. In the Morton Salt case, the result of the FTC's 
plea was that the price of salt must include the cost of 
the wholesaler's function, whether actual or not. In the 
Cement case, the result, in effect, was that the price must 
include the cost of the freight (in other words the seller 
was not allowed to "absorb" the freight charge by paying 
it out of his own pocket to get the distant business). 
And in the Detroit case again, the price was made to in- 
clude what might be called a "proper" cost for the job- 
ber's function (that is, the goal was to prevent the jobber 
from reducing his markup). 

The relation between cost and price is a significant 
one. A sales manager will not consistently charge less 
than his known costs or consistently take a loss on busi- 
ness. He will, in many markets, charge a price well 
above his costs. But for various reasons he may shave 
that price down to a razor-edge above his estimated costs, 
to increase or to hold his volume of business. 

Thus he may be willing to "absorb" freight to distant 
markets in order to get added business, which often may 
permit larger volume with resultant mass-production 
savings. He may offer substantial discounts for quantity 
sales, which also may save on selling costs, whether the 
quantity goes out all at once or over a period of time. 
And he may cut his price to the bone to meet a competi- 
tor's lower price and so hold on to his customers ("good- 
faith" price reductions) . 

But all three of these forms of price reduction have 
been endangered by the Federal Trade Commission: 
freight absorption in the Cement case, quantity discounts 
in the Morton Salt case, and cuts to meet competition 



THE FORGOTTEN CONSUMER 41 

in the Detroit gasoline case. In each case, the brake was 
put on price reductions explicitly for the protection of 
competitors who were small local producers in the freight 
absorption case and independent retailers in the Morton 
Salt and Detroit gasoline cases. 

The Federal Trade Commission is here following the 
spirit of the Robinson-Patman Act. As the Supreme 
Court pointed out in the Morton Salt case, that Act was 
designed to prevent injury to competitors. And it was 
said of the bill in Congress during its passage in 1936: 

Mr. Logan: I might say that the bill is not aimed exclusively 
at chain stores. It applies to all large units which control 
great purchasing power. 8 

Mr. Edivall: The bill is designed to accomplish what, so 
far, the Clayton Act has done in an important manner, 
namely, to protect the independent merchant. 9 

Federal courts support this attitude. Almost their 
entire preoccupation is with the competitor. The con- 
sumer and the general public interest go quite unmen- 
tioned, as anyone can see by reading the decisions, but 
the courts' concern for competitors goes to extraordinary 
lengths. It applies not only to present but to possible 
future competitors. The courts look out, not only lest 
existing competitors be actually injured, but lest there 
be a "reasonable possibility" that prospective competitors 
might be injured. 

All this is done in the name of fostering competition, 
yet obviously this concern for competitors is bound to 
lessen the vigor of competition. If it is illegal for sellers 
to absorb freight to distant markets, the effect is to reduce 
the number of competitors who will try to sell in those 
markets and thus to encourage local monopolies. If it 
is legally dangerous to offer quantity discounts, then large 
buying organizations are partly excluded from the market. 



42 THE FORGOTTEN CONSUMER 

And if, as the FTC successfully maintained in the Cir- 
cuit Court in the Detroit gasoline case, it may be illegal 
to match a competitor's price if some one down the dis- 
tribution line is hurt, then competition is obviously 
lessened. 

The effect is strikingly like what is sought in the cartel 
system. The dictionary defines "cartel" as "an agree- 
ment between rival merchants to limit production or 
otherwise temper the extremity of competition." The 
essential purpose of a cartel is to keep competitors from 
cutting each others' prices. The methods — dividing up 
of markets by percentage or territory, and so forth — are 
of less importance. The goal is to restrain disturbing 
influences, to stabilize prices, and to assure those in the 
business the comfortable feeling that their position is 
secure. This is the trend in present Trade Commission 
and Court interpretations of the Clayton Act, as amended 
by the Robinson-Patman Act. 

The consumer pays the bill. 



6. Do We Really Want 
Competition? 



Economists have for some time been concerned about 
the high cost of distribution. 

Back in 1939 the Twentieth Century Fund made a 
big study of these costs. In a preliminary release it said, 

About 59 cents of the consumer's dollar goes for the 
services involved in distribution. ... In 1929 some $66 
billion was paid by consumers . . . for finished goods, but 
. . . nearly $39 billion was the cost of distributing them. . . » 
Only $9 billion was for transportation ... $1 billion for 
advertising, instalment selling, and other charges. 

Some $12.8 billion was for retail distribution, and about $7 
billion was the cost of wholesale trade. In the same year the 
railroads took in less than $5 billion for freight, and the 
national farm cash income was only around $10.5 billion. 
In other words, the nation paid more for retail distribution 
than ... to all its farmers, and more for wholesale distribu- 
tion than for its rail freight bill . . . 

Since then, the figures have at least doubled. Thus 
the Harvard Business Review said editorially in its May 
1950 issue: 

It is generally estimated that not less than 50 cents of each 
dollar of the consumers' $128 billion spent in 1949 at retail 
was required to cover distribution outlays as distinct from 
production outlays. Of this it is entirely probable that 
retailing . . . requires on an average at least 25 cents. 

43 



44 DO WE REALLY WANT COMPETITION? 

As a matter of fact, in the case of the consumer's apparel 
dollar and household furnishings dollar, something like 33 to 
36 cents is today required to cover the retailer's gross margin, 
of which incidentally less than 3 cents remains for the 
retailer's net profit after taxes. 

These figures will indicate how much is at stake in the 
present interpretations of the antitrust laws. They 
seem to say that the American public spends about $60 
billions a year to have the goods it buys moved, financed, 
displayed, sold, and delivered to it- — perhaps $400 per 
capita or $1200-1600 per family, about evenly divided 
between retail and wholesale costs. 

Until less than a generation ago, the "high cost of dis- 
tribution" was something like the weather. "Everybody 
talked about it, but nobody did anything about it." 
Within the last 20 years or so, however, an amazing 
variety of new marketing and distributing operations 
have been developed, including corporate chains, volun- 
tary chains, super-markets, and so on. A virtual revolu- 
tion began to get under way. In any kind of revolution, 
even an economic one, somebody is bound to get hurt. 
And it was natural that some of the people in the line of 
fire should try to protect themselves by getting laws 
passed. 

The amounts at stake are obviously huge. If, for in- 
stance, merchandisers with new methods drive down 
retail prices by only as much as one per cent, this would 
mean a total of over %l l A billions. This is a painfully 
large figure to retailers. If their net profit margins are 
only around 3 per cent, this would clip off a third unless 
they too could cut their operating costs by a correspond- 
ing amount. 

Some industries in this country have been regulated 
almost from time immemorial, such as railroads, light and 



DO WE REALLY WANT COMPETITION? 45 

power, and the telephone and telegraph business. Com- 
petition has been replaced with legal monopoly. This 
was done for the benefit of the consumer. The idea 
was that he would be better served by the economies of 
regulated monopoly than by the vigor of free competi- 
tion. Perhaps a classic example was the merger, during 
the 1930's of Western Union and Postal Telegraph, en- 
forced by Congress. The idea here was that the savings 
of a single system would outweigh the advantages of the 
stimulus of competition. 

Since 1933, however, a new type of regulation has 
come into vogue, which is for the benefit not of the con- 
sumer but of the producer, that is, of competitors. It 
began with the National Industrial Recovery Act of 1933, 
with which Congress breached the antitrust laws and 
set up something designed to hold prices up, not down, 
and to protect competitors against the rigors of com- 
petition. 

The NRA was outlawed by the Supreme Court, two 
years later. But its spirit lingered on. It appeared in 
the Guffey Coal Act of 1937, which aimed at "stabiliz- 
ing" the soft-coal industry by limiting production and 
holding up prices, with the help of a heavy tax on coal 
sold in excess of quota. It carried a general antitrust 
waiver for producers who complied with its provisions. 
It had a statutory little brother in the state-enacted Kane 
Act for the anthracite industry. 

In like fashion, the Emergency Transportation Act of 
1933 created a railroad "co-ordinator" empowered to 
force operating economies on the railroads like the joint 
use of terminals. The Motor Carrier Act of 1935 re- 
quired interstate truckers to get "certificates of necessity" 
from the Interstate Commerce Commission. And the 
Jones-Costigan Sugar Act of 1934, since renewed every 



46 DO WE REALLY WANT COMFETITION? 

three years, imposed quotas on both the import and 
domestic production of sugar. 

All of the above, with the possible exception of the 
Transportation Act of 1933, were designed to prevent 
"ruinous competition" and thus were frankly aimed at 
protecting competitors from each other rather than at 
protecting consumers. They were set up on the prin- 
ciple of the cartel, rather than on the philosophy of the 
antitrust laws. But, perhaps, the outstanding example 
of the new economics was in the farm program, includ- 
ing the Agricultural Adjustment Act of 1933 and the 
Farm Marketing Act of 1938, with acreage allocations 
and the more drastic marketing quotas eventually applied 
to cotton, wheat, tobacco, peanuts and rice. 

It was not surprising, in this political climate, that the 
distributing industry should push similar proposals. Dis- 
tributors, too, were under heavy competitive pressure, 
not only from the depression, but from the new mass- 
distributing, cost-cutting methods being introduced into 
distribution. Backed by retailers' and wholesalers' or- 
ganizations, there came a wave of state minimum mark-up 
laws, patterned on the old NRA grocers' code. There 
was another wave of state laws permitting resale price 
maintenance on trademarked and branded goods, pat- 
terned on the old NRA druggists' code, and topped by 
the Miller-Tydings Act. This Act was a rather incon- 
gruous amendment to Section One of the Sherman Anti- 
trust Act and it permitted the movement, in interstate 
commerce, of goods sold under these state resale price 
maintenance or so-called "fair trading" acts. Punitive 
taxes on chain stores were also pushed through many 
state legislatures. 

But the outstanding piece of legislation was the Robin- 
son-Patman Act of 1936, amending the Clayton Act of 



DO WE REALLY WANT COMPETITION? 47 

1914, originally sponsored in Congress by the United 
States Wholesale Grocers Association and the National 
Association of Retail Grocers. The sponsors of the bill 
were perfectly frank in saying that it was aimed at the 
chains; the latter retorted that it was a featherbedding 
device for wholesalers, jobbers, and retailers. 

It took a number of years for the implications of the 
Act, which like the Clayton Act is administered by the 
Federal Trade Commission, to become evident. The 
Commission lawyers have stuck to the spirit of the Act, 
and, going even further, have pursued the spirit of the 
original bill, which was much modified in its passage 
through Congress. The purpose of the sponsors, and the 
evident goal of the FTC lawyers, has been to tighten up 
the price-discrimination features of the original Clayton 
Act, broadening the circumstances in which it is illegal 
to cut prices to one customer below another's and nar- 
rowing the circumstances (quantity discounts, "good 
faith" meeting of competitors' prices) in which it is legal. 
With a sympathetic federal court interested almost solely 
in the "struggling competitor" rather than the public, the 
FTC has achieved phenomenal legal success, in the Mor- 
ton Salt case (quantity discounts), the Cement case 
(freight absorption), and the Detroit gasoline case 
("good faith" price reductions). 

An amusing angle of the situation appears in the efforts 
of the lawyers of the big chains and other mass distribut- 
ing agencies to find ways to get around the law. In 
Chapter 3 it was reported how various government of- 
ficials and Congressmen wanted the antitrust laws to 
remain "fluid" lest New York antitrust lawyers find ways 
to get around them. The implication was that these 
corporate attorneys were ceaselessly on the search for 
ways to restrain trade and raise prices. Thus the Chair- 



48 DO WE REALLY WANT COMPETITION? 

man of the House Judiciary Committee — ". . . I would 
vigorously oppose any antitrust laws that attempted to 
particularize violations. . . . Otherwise . . . the proc- 
ess would become a rat-race between the monopolist 
seizing upon omissions and the Congress trying to fill 
them into the law. . . ." The facts run the opposite 
way. For although high-powered batteries of corporate 
lawyers do ceaselessly search for ways to get around the 
law, what they are looking for are ways to release trade 
and cut prices to the consumer, without incurring a viola- 
tion. For as the law is now written, interpreted, and en- 
forced, almost all price reductions skirt the narrow edge 
of legality and verge on being bootleg. This is an odd 
and unfortunate thing to have to say about the antitrust 
laws. 

Some antitrust* lawyers are now minded to recom- 
mend three important changes in corporate selling policy 
that would, to some degree, release the sales departments 
of the more aggressive companies from the new restraints 
imposed by these recent laws and interpretations. 

It has become potentially embarrassing, under the rul- 
ing of the Detroit gasoline case, to sell to both wholesalers 
and retailers in the same area. A company that does 
this may, like Indiana Standard, incur the unpleasant 
choice of violating the Sherman Act by insisting that its 
wholesale customers maintain resale prices, or of violat- 
ing the Robinson-Patman Act by letting them cut as 
they will. There is no such problem for a company that 
sells only to wholesalers or only to retailers. 



* For purposes of brevity, the phrase "antitrust lawyers" will be 
used occasionally in the text to refer to privately employed lawyers 
who specialize in the antitrust laws, and the phrase "Antitrust lawyers," 
when occasionally used, will refer to the government lawyers of the 
Antitrust Division of the Department of Justice. . 



DO WE REALLY WANT COMPETITION? 49 

Secondly, since the Morton Salt case, embarrassment 
may result if a company sells in both small and large 
quantities. The discount for the larger quantities may 
not please the FTC. There is no such problem for a 
company that sells only in small or in large quantities. 

And thirdly, following the Cement case, a company 
may invite legal action if it sells cement, steel, sugar, or 
other bulky standard commodities both at a distance 
and near the mill. If it absorbs freight to get into a 
distant market, its action may come to the FTC's atten- 
tion as violating the FTC's idea of different "mill-net" 
receipts as being a geographical price-discrimination 
against nearby customers. 

The simplest solution a company can embrace, to avoid 
these problems, is to "integrate," that is, to buy or build 
its own equivalent of the wholesaler and the retailer, so 
that it is a complete and single corporate unit from the 
factory to the consumer. Thus it could bypass not only 
the costs but the legal hazards of dealing with the middle- 
man or the retailer. In the case of freight absorption, 
the answer would be "horizontal integration" — the pur- 
chase of mills in distant markets. But the government 
lawyers and the people who framed the Robinson-Pat- 
man Act have foreseen this kind of evasion. As related 
in Chapter 14, integration of production and distribu- 
tion is, also, frowned upon. 

The ultimate consumer has had little representation in 
this long political struggle. He has seen it first face-to- 
face in the publicity fight of the A&P. But in the last 
analysis, it may be the consumer who will answer the 
question, "What kind of competition do we want — hard 
competition or soft competition?" 



7. Mousetrap Maker's Hazard 



The year 1888 saw two things happen of importance 
in American history. Few people probably noted them 
at the time. In those days of gaslights, handlebar mus- 
taches, sideburns, hoopskirts, and antimacassars, the chief 
national news was what President Cleveland and Con- 
gress would do about the tariff and silver. 

But in that year, the Standard Oil Trust was formed, 
to control petroleum refining in the United States. And 
a half-dozen men, after raising $20,000, started commer- 
cial production of aluminum in a corrugated-iron shed 
with a dirt floor in Pittsburgh. Aluminum was then 
selling at $8.00 a pound. The midget Alcoa (Aluminum 
Company of America) produced its first specimens in 
the fall. Output averaged less than ten pounds a day at 
the start. The hard-working founders locked up the 
product each night for safety in the office safe. 

The men that put together the legal device of the 
Standard Oil Trust and the men that refined the first 
aluminum started forces that have grown and enlarged 
down the decades, until they finally met head-on a few 
years ago. 

The gist of the Oil Trust plan seemed a good one at 
the time. It was much like the modern cartel, or the 
modern ideas of the FTC lawyers, to soften the effects 
of hard competition. But it helped to raise the political 
storm which produced the Sherman Antitrust Act of 

50 



MOUSETRAP MAKER'S HAZARD 51 

1890. The gist of the Alcoa idea was almost the op- 
posite. It was innovation. The idea was to develop 
something new and, as it developed, to keep it always 
new, cheap, desirable, and ahead of competitive products. 
Both of these ideas were typically American; and still 
are. The one was conservative of values and the other, 
in the final analysis, destructive of commercial values. 

By the late 1930's the founders of the Aluminum Com- 
pany of America had cut the price of aluminum to 20 
cents a pound and, raised its production to over 300,000,- 
000 pounds a year. They had developed markets for 
it successively in novelties, in the "quieting" of molten 
steel, in bicycles, saucepans, high-voltage wires, and 
airplanes. In so doing they pushed and intruded them- 
selves into the markets of the men who sold special 
steels, copper and other nonferrous metals, and had, 
also, in the every-day language of business, "created new 
markets," by repeatedly lowering price and developing 
new uses. 

They worked at is so hard that for fifty years their 
Alcoa was the only maker of aluminum in the United 
States. Other people, including the automobile com- 
panies, who have both engineering know-how and long 
pocket-books, considered going into the business and 
decided they could get their aluminum cheaper or at 
less risk from Alcoa. In 1938, two years before the na- 
tional defense program started, Alcoa embarked on a 
$200,000,000 war-expansion program. 

In 1937 the Antitrust Division of the Department of 
Justice sued the Aluminum Company of America for 
violation of Section 2 of the Sherman Antitrust Act, or 
in other words, for being a monopoly, in the aluminum 
business. Alcoa had already run afoul of the Sherman 
Act in 1912, and signed a "consent decree" to stop 



52 MOUSETRAP MAKER'S HAZARD 

certain practices. And thereafter it had retained a bat- 
tery of lawyers to keep it on the straight-and-narrow 
path of the antitrust law. They read all the Supreme 
Court opinions, and advised the company accordingly. 

Up to the late 1930's, or until the reconstitution of the 
present "new" Supreme Court, the top court of the land, 
in interpreting the Sherman Antitrust Act, had stuck to 
"abuses" and "predatory tactics." As Chief Justice 
Stone said, the Sherman Act "was enacted in the era of 
'trusts' and of 'combinations' of businesses and of capital 
organized and directed to control of the market by sup- 
pression of competition in the marketing of goods and 
services, the monopolistic tendency of which had become 
a matter of public concern. 

"The end sought," he went on, "was the prevention 
of free competition in business . . . which tended to 
restrict production, raise prices or otherwise control the 
market to the detriment of purchasers or consumers of 
goods and services, all of which had come to be regarded 
as a special form of public injury." * The Alcoa lawyers 
presumably relied on the federal courts' continuing to 
take the same view of the Sherman Act. They were 
due for a jolt. 

The trial started on June 1, 1938, and ended August 14, 
1940. It is said to have been the longest trial, up till 
then, in the history of the world. Testimony and argu- 
ment took 364 court days. (This was near the eve of 
Pearl Harbor, Alcoa had its hands full with defense busi- 
ness, Alcoa top executives had to cool their heels in 
court, and it was fortunate at least that the company had 
started its expansion program two years earlier.) The 
court record reached more than 40,000 pages, plus nearly 
10,000 pages of exhibits. The transcript weighed 325 
pounds, and the final record was printed in 480 volumes, 



MOUSETRAP MAKER'S HAZARD 53 

containing an estimated 15,000,000 words, or more than 
30 times as many as Gone with the Wind. 

An amusing account of the trial and circumstances was 
given in the New Yorker. 2 It said: 

From the narrow-minded legal point of view, the trial 
was a set-back for [Thurman] Arnold [head of the Antitrust 
Division]. There were about a hundred and forty points 
involved, and he lost by the score of 140-0. All the charges 
of German domination, international conspiracies, unfair 
treatment of competitors, and excessive prices were swept 
aside. 

In a practical sense, however, Arnold was victorious. 
He forced Alcoa to spend more than $2,000,000 to defend 
itself. Few corporations can afford to spend $2,000,000 or 
any substantial fraction of that sum to defend an antitrust 
suit, whether groundless or not. 

The $2,000,000 has been only a part of the penalty which 
Alcoa paid for resisting Arnold. The officials of Alcoa 
should have been spending all their time during the last 
three years increasing the output of aluminum, but they have 
been compelled to devote half their time to disproving 
Arnold's charges. 

Alcoa has suffered other indirect penalties. Using the 
disproved charges as if they were proved charges, Arnold 
led a furious newspaper campaign against the Aluminum 
Company. Other government officials backed up Arnold. 
Jesse Jones loaned about $100,000,000 to Alcoa's com- 
petitors. Harold Ickes held up an application of Alcoa for 
water power for making aluminum. Senators and colum- 
nists joined the hue and cry. The public has been taught that 
aluminum is the lowest and most degraded substance in the 
table of elements. 

Antitrust appealed its defeat in the trial court. 

"Since the Supreme Court was unable to obtain a 
quorum to sit on the appeal, (320 U. S. 708) the case was 
certified to the Circuit Court of Appeals (CCA. 2) on 
June 12, 1944, (322 U. S. 716) which reversed the de- 
cision of the lower court and held that the Aluminum 



54 MOUSETRAP MAKER'S HAZARD 

Company was an illegal monopoly at the time of 
trial . . ." 3 

Alcoa lost in the Circuit Court on a single count of the 
one hundred forty, that it had "monopolised" the market 
for virgin aluminum ingots. 

A recent statement by a group of top antitrust law- 
yers stated, 

For a long time, it was supposed that unless size were 
obtained or retained by an inherently illegal means or by an 
actual abuse of overpowering strength in the competitive 
field, growth in size was not a violation of the [antitrust] 
law. 

It was supposed that a concern might engage in actively 
enlarging its market and the scope of its business, and go 
ahead by its efficiency, foresight, technical improvement, 
accumulation of its resources, and ability to attract additional 
resources, as far as these efforts could take it — and we had 
language from the Supreme Court that would seem to justify 
that concept. 

Now the Aluminum case looks the other way — even 
though a concern has exercised only that type of business 
energy and sound judgment which, act by act, is beyond 
reproach, in seizing upon opportunities for the development 
of the size and scope of its business. . . . 4 

The Circuit Court of Appeals — Judge Learned Hand 
writing the decision — stunned the entire legal fraternity, 
from Pennsylvania Avenue to Forty-Second Street, with 
its decision. 5 

Since this important opinion is in legalese, the reader 
who is not also a lawyer should read it slowly. For 
these words sent a thrill through the hearts of government 
lawyers, and a chill through the hearts of business lawyers. 

(And the nontechnical or nonlegal reader should know 
beforehand that the phrase "to exclude competitors" — or 
any tense or gerundive of it — means, by previous Sher- 
man Act interpretations, to violate the law).. 



MOUSETRAP MAKER'S HAZARD 55 

Said the Couift: "[Alcoa] insists that it never excluded 
competitors; but we can think of no more effective ex- 
clusion than progressively to embrace each new oppor- 
tunity as it opened, and to face every newcomer with 
new capacity already geared into a great organization, 
having the advantage of experience, trade connections, 
and the elite of personnel." 

And the Judge went on to say, "Only in case we in- 
terpret 'exclusion' as limited to manoeuvres not honestly 
industrial, but actuated solely by a desire to prevent 
competition, can such a course, indefatigably pursued, 
be deemed not 'exclusionary.' " 6 . 

In effect the Court said that Alcoa excluded com- 
petitors by being so efficient. This was a new view of 
the meaning of the Sherman Antitrust Act. Up to this 
opinion (which is now the law) if you excluded com- 
petitors, in the eyes of the law, you did so by roughing 
them up, buying them out, intimidating them, or in some 
such way as by "manoeuvres not honestly industrial" 
for getting them out of your way. Alcoa beat its com- 
petitors and potential competitors by keeping ahead of 
them. This was a new kind of crime. (This was per- 
haps also the legal basis on which the Department of 
Justice now says that "efficiency is no defense.") 

The Court's opinion, incidentally, went at some length 
into the competition between virgin aluminum and scrap 
or used aluminum. They compete and, chemically, are 
the same. The Court found Alcoa's monopoly in virgin 
aluminum, and talked the rest of the company's com- 
petition away. In this connection, Alcoa's president 
recently stated that "aluminum competes with cop- 
per, zinc, steel, wood, plastics, and dozens of other ma- 
terials." 7 

On the general subject, the New York Journal of Com- 






is A 



56 MOUSETRAP MAKER'S HAZARD 

merce said, editorially, (June 1,1950) that "The Sherman 
Act was not designed to punish dynamic progress, and 
to reduce competitors to a common level of medi- 
ocrity . . . 

"To all appearances a new paraphrase is being sub- 
stituted for Emerson's old maxim: Build a better mouse 
trap, sell enough of them, and Justice Department at- 
torneys will beat a path to your door." The Justice 
Department attorneys have already begun beating a 
path to the door of other corporate better mouse-trap 
makers. 

In 1925 the General Electric Company bought from 
the German Krupp company a flimsy patent on an 
inferior synthetic cutting material (tungsten carbide). 
Krupp had had the American patent. The product was 
cemented on the tip of machine-tool cutting arms to cut 
steel. It was the next hardest thing to a diamond. But 
it was difficult to make, difficult to cement on to the 
tool, and difficult to sell. 

General Electric set up a wholly-owned subsidiary 
company, called Carboloy, Inc., to improve and sell it. 
Carboloy ran into a string of production problems and 
then into the depression; for eleven years it failed to 
make money. General Electric kept putting in more 
money, but the price was cut again and again. By the 
late 'thirties the thing was a technical and commercial 
success. It proved invaluable in World War II and 
production was multiplied by 44 between 1938 and 
1942 to meet the demand. The Department of Justice, 
however, sued GE, Carboloy, Inc., and Carboloy's of- 
ficers under the Sherman Act and won a conviction. 
The government lawyers asked for jail sentences, but 
the court would not go that far and let the defendants 
off with fines of $5,000 apiece. 



MOUSETRAP MAKER'S HAZARD 51 

Du Pont ran into similar trouble with cellophane. / 
After spending millions on research and development of 
this wholly new thing, they put it on the market in 1926 
at $2.65 a pound. Its success was such that the com- 
pany subsequently cut the price 20 times in the next 20 
years, down to 45 cents a pound. Demand grew to 
nearly $100,000,000 a year at the lower price and after 
the war Du Pont prepared to increase capacity still fur- 
ther to supply the growing market. 

But the Department of Justice moved in and sued 
Du Pont under the Sherman Act for monopolizing cello- 
phane. The Du Pont directors thereupon cancelled their 
expansion plans, feeling it would be poor practice, as 
well as unfair to their stockholders, to expand further 
an operation already charged with being illegal. 

In consequence, cellophane remained scarce. Since 
Du Pont continued to sell it at a price based on costs 
rather than on what a hungry market would pay for it, 
cellophane went into a "gray market" at prices higher 
than Du Pont was charging. Du Pont had tried what 
might be called a resale price maintenance policy in 
reverse. In contrast to the resale price maintenance 
policy, which the FTC lawyers imposed on the Standard 
Oil Company of Indiana in the Detroit gasoline case, du 
Pont tried to keep the resale price of cellophane down, 
not up. 

In 1950, the company ran full-page advertisements in 
the trade magazines of the principal industries using 
cellophane. One of these made the following astonish- 
ing statements: 

The Du Pont Company regrets that it is unable at this 
time to meet the growing requirements of its customers for 
Cellophane . . . Several years ago, Du Pont foresaw a sub- 
stantial increase in the use of Cellophane and planned to build 



58 MOUSETRAP MAKERS HAZARD 

additional plant capacity, to become available about the 
middle of 1949 . . . 

Preliminary plans, estimates and investigation of plant 
sites were well under way when the Department of Justice 
brought suit in December 1947, charging that our position 
in the Cellophane business constitutes a monopoly. 

. . . Pending the outcome of this litigation, it was con- 
sidered unwise to proceed with the proposed construction. 

Du Pont, therefore, actively sought to interest others in 
the manufacture of Cellophane, in order that additional film 
would be available to the trade as soon as possible. It 
required more than a year and a half to find a company 
willing and able to invest the large amount of capital — 
approximately $20,000,000 — necessary to enter the field on 
an economically efficient basis. 

Now, construction is under w T ay on a new Cellophane 
plant, designed and being built by Du Pont for Olin Indus- 
tries, Inc., at Pisgah Forest, North Carolina, to have an 
initial capacity of about 33 million pounds annually. All 
Du Pont Cellophane patents and know-how are being made 
available to them. It is hoped that this plant will be in 
production by the middle of next year . . . 



8. Opportunity for Abuse 



Many businessmen complain that the government 
lawyers are now attacking American businesses merely 
because they are big. They say that bigness in business 
is in itself being made a crime. They point to suits 
recently brought by the Antitrust Division for some form 
of break-up of the leading meat-packers, of the American 
Telephone and its manufacturing subsidiary Western 
Electric, of du Pont, General Motors and United States 
Rubber, of General Electric's Lamp Department, and of 
the New York Great Atlantic & Pacific Tea Company. 
"The Department of Justice, "they say, "wants to 'atom- 
ize' big business." 

Justice Department officials deny this, over and over. 
As Attorney-General, the Present Justice Tom Clark 
told a Congressional Committee, "We have not attacked 
bigness — although we have been accused of it — because 
of bigness itself." 1 And former Assistant Attorney- 
General Herbert A. Bergson has said: 

We have never brought a case attacking bigness. . . . 
There is no case that we have filed, no position that we have 
taken . . . which provides any foundation for (the) belief 
. . . that our present antitrust enforcement program is a 
threat to mere size. . . . On the contrary, on numerous oc- 
casions as head of the Antitrust Division I have publicly 
stated that bigness is not an antitrust crime and that I 'will 
not bring a case predicated on bigness alone. . . . 2 

59 



60 OPPORTUNITY FOR ABUSE 

Strictly and legally speaking, the Justice officials are 
quite correct. They speak, in fact, by the book. The 
Supreme Court has specifically said that mere corporate 
size is not an offence against the Sherman Antitrust Act. 3 
And this is one of its explicit findings which it has never 
explicitly reversed. Thus the Justice Department offi- 
cials not only are safe in saying this, but they have to say 
it. If they said otherwise they would be called, 
promptly enough, by any number of members of the 
antitrust law bar. 

But today the word of the law and the spirit of the 
law (as now interpreted) are not always the same. And 
in this case the businessmen who complain of the attack 
on bigness have something. The safety of a big com- 
pany against antitrust prosecution today is something 
like what the geometry professors call a "variable ap- 
proaching zero." What the Supreme Court has had to 
say about bigness can best be spelled out in its own words. 
They are the law, after all. 

Over 30 years ago the Supreme Court stated cate- 
gorically that mere bigness was not in itself a violation 
of the antitrust laws. 4 Twelve years later, however, the 
Court began chipping at this statement, or, so to speak, 
beating a path round it. Justice Cardoza, in the Swift 
case, 5 quoted the earlier opinion, but then added what 
lawyers call a "gloss" to it. Professional writers might 
call it a "throw-away line." He said: 

/ Mere size, according to the holding of this court, is not 
an offense against the Sherman Act unless magnified to the 
point at which it amounts to a monopoly . . . but size 
carries with it an opportunity for abuse [italics added] that 
is not to be ignored when the opportunity is proved to have 
i^ been utilized in the past. 

This language was used by Judge Learned Hand in 
the Alcoa case as a springboard from which to jump to 



OPPORTUNITY FOR ABUSE 61 

the conclusion that Alcoa, because it controlled 90 per 
cent of the ingot market, was an unlawful monopoly. 
And he added the thought, 

Throughout the history of these statutes it has been con- 
stantly assumed that one of their purposes was to perpetuate 
and preserve, for its own sake and in spite of the possible 
cost, an organization of industry in small units which can 
effectively compete with each other. 

The Court showed its 
Tobacco case. 6 It said, 



feelings a little more in the 



without adverse criticism of it, comparative size on this 
great scale inevitably increased the power of these three 
[tobacco companies] to dominate all phases of their industry. 
"Size carries with it an opportunity for abuse that is not to be 
ignored when the opportunity is proved to have been 
utilized in the past." 

By now the Court was moving steadily toward the idea 
that the Sherman Antitrust Act is one law for the big and 
one for the small. Two years later it said, "In determin- 
ing what constitutes unreasonable restraint (of trade) 
. . . we look ... to the percentage of business con- 
trolled. . . . Size has significance also. . . ." 7 

But it was the minority's opinion in this case that sent 
the shudders through the antitrust bar in New York. It 
was signed by four judges. And it said, or almost 
shrieked, 

"We have here the problem of bigness. Its lesson should 
by now have been burned into our memory by Brandeis. 
'The Curse of Bigness' shows how size can become a menace 
— both industrial and social. It can be an industrial menace 
when it creates gross inequalities against existing or putative 
competitors. It can be a social menace because of its con- 
trol of prices. . . . Size in steel ... is the measure of the 
power of a handful of men over our economy. . . . The 
philosophy of the Sherman Act is that it should not 
exist. . . ." 



62 OPPORTUNITY FOR ABUSE 

The trap was pulled, however, in one of the so-called 
"motion picture cases." Here the majority said, in the 
words of Justice Douglas (who also wrote the Columbia 
Steel dissent) : 

"It was said in United States v. United States Steel 
Corporation that mere size is not outlawed. . . . But 
size is, of course, an earmark of monopoly power." 8 
(italics added) 

Now in this brief remark, Justice Douglas "said a 
mouthful." For he focussed here on something that 
the Supreme Court and the government lawyers have 
been doing in the last ten years, which many businessmen 
seem to have overlooked. These businessmen have been 
worrying about an alleged "attack on bigness." But they 
have been looking in the wrong direction, or using or 
listening for the wrong words. The Supreme Court has 
not condemned bigness as a "per se" or in-itself violation 
of the law at all. But it has meantime developed a 
vastly larger violation of the law, called "monopoly 
power." 

This "monopoly power" is something that can be 
found wherever there is "opportunity for abuse." It 
is something that can be found in some of the smallest 
as well as in the biggest companies. Size is only an 
"earmark" of it. It can be found, if anyone wants to 
look for it, in the boy who sells the most and best lemon- 
ade at the fair-grounds for the least money just as easily 
as in the biggest corporation in the United States. The 
Department of Justice has just found it in the company 
that does the biggest business in live carp in Philadelphia. 9 

"Monopoly power" appears to be nothing more than 
legalese for "economic power," which is characteristic 
of many more companies than have bigness. How it 
came to be a violation of the Sherman Antitrust Act 



OPPORTUNITY FOR ABUSE 63 

simply to have this "monopoly power" is an amusing 
story of legal semantics, or double-talk. It has been a 
fast job, too. It began with the Alcoa case, already 
described. The reader will remember that up to this 
case, when the courts said it was illegal to "exclude 
competitors," they meant this only in the sense of using 
rough stuff or "predatory practices." This meant things 
like price-fixing agreements, 10 production control agree- 
ments, 11 boycotts, 12 division of markets, or allocation of 
customers. 13 

In the Alcoa case the Circuit Court (with the later 
blessing of the Supreme Court) said in effect that it was 
just as bad to exclude competitors by keeping ahead of 
them as by "manoeuvres not honestly industrial." 

That was Step One. Step Two came in the To- 
bacco case. 14 

The Tobacco case came up to the Supreme Court on 
the single question of whether the government lawyers, 
to prove a Sherman Act violation, had to prove that the 
defendants had actually excluded competitors. The 
Court said they didn't have to. It said so in these words: 

The question squarely presented here ... is whether 
actual exclusion of competitors is necessary to the crime of 
monopolization. . . . Such actual exclusion is not neces- - 
sary . . . provided [the defendants] . . . have such power 
. . . and the intent and purpose to exercise that power. . . . 

Neither proof of exertion of the power to exclude, nor 
proof of actual exclusion, of existing or potential competi- 
tors, is essential to sustain a charge of monopolization under 
the Sherman Act. . . . 

The Tobacco decision, on top of the Alcoa decision, 
gave a heavy jolt to the antitrust-law fraternity. Al- 
though the Aluminum ruling said that an organization 
could violate the law by keeping ahead of competitors, 
this later decision inferred that it might violate the law 



64 OPPORTUNITY FOR ABUSE 

even if it didn't keep ahead, but only, perhaps, in the 
eyes of the government lawyers, would like to (that is r 
by having the "intent") . In the Tobacco case the outside 
competitors, in the period of years under review, had 
more than tripled their share of the business, from around 
9 per cent to around 32 per cent. 

But the antitrust fraternity was due for a further jolt 
and it came soon in the Griffith case. 15 In this case the 
lower court had "found that no competitors were driven 
out of business, or acquired by appellees, or impeded in 
their business by threats or coercion." More than that,, 
there was no charge of "intent." The Griffith movie- 
chain people had, according to the record, merely gone 
about their business of trying to make more money, to 
do more business, to make more money, to do more 
business, without hoping to hurt their competitors, or 
apparently even caring what happened to them. 

Here the Court knocked out the requirement of "in- 
I tent." Said Justice Douglas, for the majority, "It is . . . 
not always necessary to find a specific intent to restrain 
trade or to build a monopoly in order to find that the 
antitrust laws have been violated. It is sufficient that a 
restraint of trade or monopoly results . . ." 

And then he went on to say that "It cannot be doubted 
that the monopoly power [italics added] of [Griffith] 
had some [italics added] effect on their competitors. . ." 
And he sent the case back to the lower court with a 
pointed suggestion that the Griffith movie circuit be 
broken up. 

Thus it seems that a company may now find itself 
violating the Sherman Act even though (1) it "excludes" 
competitors only by keeping ahead of them (Alcoa case) ; 
(2) it doesn't even keep ahead of them (Tobacco case); 
and (3) it doesn't try to (Griffith case). 



OPPORTUNITY FOR ABUSE 65 

Or to put it another way: In the old days, to violate 
the law, you had to have power, use it, and use it "wrongly 
(unreasonable restraint of trade). With the first step^ 
of the change, you only had to have it and use it (re- 
straint of trade). But today you need only have it 
("monopoly power"). 

And the Court, with its ultra-sensitive feeling for com- 
petitors who might be hurt, does not think merely about 
actual competitors, already in business and suffering from 
the "hard competition" of a defendant company with 
"monopoly power." It thinks of imaginary or pros- 
pective ones. Thus, in the Alcoa case, the Judge said 
"It can make no difference whether an existing com- 
petition is put an end to or whether prospective com- 
petition is prevented." In the Tobacco case the Court 
said, "Prevention of all potential competion is the natural 
program for maintaining a monopoly here, rather than 
any program of actual exclusion." In the Columbia Steel 
dissent the minority spoke of "existing or putative com- 
petitors." And in the Griffith case the Court said that 
"the antitrust laws are as much violated by the prevention 
of competition as by its destruction." 

This phenomenal concern of the Supreme Court about 
the fate not merely of flesh-and-blood competitors but 
of competing young companies yet to be born, is remi- 
niscent of its attitude in the Morton Salt and Cement In- 
stitute cases, already discussed, about reasonable "possi- 
bilities" that some competitor, somewhere, sometime, 
might be hurt. 

"Monopoly power" appears to have no other meaning 
than "economic power" — though even this is a vague 
term. And if this is so, it is a far more sweeping in- 
dictment than mere "bigness." Almost any company 
of any size can be shown to have some competitive ad- 



r 



66 OPPORTUNITY FOR ABUSE 

vantage at some particular point or in some particular 
way. 

The change in the law violates deep feelings and long- 
established principles of Anglo-Saxon law. For the law 
now says about business firms much the same as though 
common law and the statutory law of the States were 
changed to mean "The power to commit grand larceny 
may itself constitute an evil and stand condemned even 
though it remains unexercised." 16 And on such basis, 
any citizen who possesses the power to commit treason 
would be subject to arrest and imprisonment. Any firm 
with any kind of economic power is now, off-hand, in 
violation of the Sherman Antitrust Act. And if the 
analogy held, any citizen with so much as a fountain-pen 
might likewise be fined or jailed. "Intent" need not 
be shown. The police would have a field day. This is 
the dissolving of law. 



9- The "Virulent Growth 
of Monopoly Power" 



In 1937 business had been recovering for four or five 
years from the Great Depression of 1932 and 1933. 
Then, suddenly, it plunged. From September 1937 to 
March 1938, the New York Times index of business 
activity dropped four times as fast as its average 1929— 
1932 drop. 

In April 1938, President Roosevelt sent a message to 
Congress asking it to look into the concentration of 
American industry. He intimated that it was getting 
worse and that it might be the cause of the "quickie" 
depression that had just come on the country. He men- 
tioned a "concentration of private power without equal 
in history," which, he said, was "seriously impairing the 
economic effectiveness of private enterprise as a way of 
providing employment for labor and capital" and he 
asked for a "thorough study of the concentration of 
economic power in American industry and the effect of 
that concentration upon the decline of competition." 

In hindsight, it looks as though President Roosevelt 
both (a) set a fashion in economic "yakety-yak" which 
persists to this day, and (b) gave serious-minded people, 
to judge by the evidence, a totally misleading steer on 
the way things are going in business. Some snide ob- 
servers in New York, in fact, claimed at the time that 

67 



68 THE "GROWTH OF MONOPOLY POWER" 

the President was trying to divert the blame for the un- 
expected depression (it did not last long however) from 
the Administration to the business community. This, 
however, has never been proved. 

The idea that business is getting more and more con- 
centrated has become politically valuable idiom in Wash- 
ington in recent years. Thus for instance President 
Truman, in his election campaign of 1948, said "Great 
corporations have been expanding their power steadily. 
They have been squeezing small business further and 
further out of the picture. . . ." 

And the President's Council of Economic Advisors, 
sometimes called the President's "captive economists," 
said in their third annual report, for 1948, that "Year by 
year, control of the market is passing more largely into 
the hands of the large corporations. . . . The process 
of expansion of large corporations by swallowing smaller 
firms continues, and the concentration of economic 
power becomes more intense." 

And the Federal Trade Commission, in a report to 
Congress in the summer of 1949, warned that ". . . if 
nothing is done to check the growth in concentration, 
either the giant corporations will ultimately take over the 
country or the government will be impelled to step 
in. . . ." 

At about the same time as this report, the brilliant, 
likeable, but economically illiterate Senator Paul Douglas 
from Illinois was quoted in the press as saying, "Small 
private enterprises are being devoured by these industrial 
giants at an alarming rate. The area for free competition 
is being progressively narrowed." And the Chairman 
of the House Judiciary Committee wrote a letter to the 
editor of the New York Times (September 2, 1949) 
saying that "Bigness is getting bigger." 



THE "GROWTH OF MONOPOLY POWER" 69 

There is nothing in these statements. They are the 
purest mythology. They do not hold water either for 
the "long term" or for the "short term." 

A recent Department of Commerce study of the 
fortunes of 1,000 American corporations between 1936 
and 1946 showed that the 200 largest had not grown as 
much as the "800 others." 

A Federal Reserve Board study published in January 
1947, of the earnings of 2700 representative firms in the 
six years 1940-1945 showed that the small and middle- 
sized firms had a "relatively greater increase in sales, 
profits, and assets" than the larger companies; that little 
fellows with assets under $250,000 showed not only a 
larger rate of return but a larger increase in that rate 
during the period; and that in durable goods, the smallest 
producers' assets expanded 140 per cent, the medium- 
sized producers', 90 per cent and the biggest firms', 40 
per cent. 

Department of Commerce figures show that the num- 
ber of separate business firms in the country, though 
dropping from about 3,300,000 in 1941 to around 2,800,- 
000 in 1943, then rose to 3,868,000 in 1948, a new high 
record. 

A study of the Research and Policy Committee of the 
CED (Committee for Economic Development) in 1947 
came up with the following conclusions: ". . . (2) the 
trend of small business activity shows an increase nu- 
merically and in proportion to population compared with 
1900. ... (4) Although the growth of big corpora- 
tions has crowded out some small business concerns, it 
has created new opportunities for others, such as the 
sales agencies, repair shops, garages, parts manufacturers, 
and other satellites that have grown up around the auto- 
mobile industry. . . ." 



70 THE "GROWTH OF MONOPOLY POWER" 

Commerce Department figures on national income and 
"gross national product" show that the income going to 
the category of "Business and Professional Income" 
(which covers unincorporated businesses) has more than 
held its own in recent years, having shown a propor- 
tionate increase second only to farm income, greater than 
corporate income, and vastly greater than "Rental Income 
of Persons," "Net Interest," or "Dividends and Personal 
Interest Income." 

This might be called the "short-term" story, covering 
the last decade or two. The "long-term" story runs even 
more the opposite of the fashionable Washington folk- 
lore. Thus for instance in oil, the country's largest 
competitive industry in terms of assets, the Standard Oil 
Company at the time of its court breakup in 1911 did 
85 per cent of the country's refining. Today its nine 
successor companies do less than 40 per cent. In steel, 
perhaps the country's most basic industry, the United 
States Steel Corporation nearly 50 years ago did nearly 
two-thirds of the country's whole steel business, but to- 
day, despite its growth, does only around one-third. In 
automobiles, perhaps the country's most dramatic busi- 
ness, the Ford Motor Company thirty years ago was far 
and away the biggest producer, but it lost its lead in the 
late 1920's to General Motors, while Chrysler slipped 
into an important part of the business. 

An article in the Christian Science Monitor of April 16, 
1949, headed, "What Will Insurance Firms' Probe De- 
velop?" said "There are seven times the number of legal 
reserve (life insurance) companies in business now as in 
1900 and 121 more than listed at the end of World War 
II, and the total rose by 35 during 1948. Moreover the 
larger companies have not grown at as rapid a rate as 
the smaller ones. The largest 12 companies . . . have 



THE "GROWTH OF MONOPOLY POWER" 71 

expanded since 1906 at a rate only two-thirds that of the 
others, while the assets of the largest four New York 
companies . . . increased in the same period at a rate 
only half that of the rest of the business. . . ." 

A favorite citation of the Washington alarmists is a 
recent report of the Federal Trade Commission on "The 
Concentration of Productive Facilities, 1947, in 26 Se- 
lected Industries." The FTC's report is purely a "still." 
It is a snapshot, not a moving picture. It does not show 
or consider whether the "selected" industries are more 
concentrated now than ten, twenty, or thirty years ago. 
Most are less so. American industry is less "concen- 
trated" than ever before. 

Perhaps a good summary of the trend may be found 
in an article in Harper's Magazine. 1 It said, and this 
quotation does not do it justice, "All new industries start 
out with a multitude of small companies: television today, 
the radio-set industry 25 years ago, the automobile in- 
dustry in 1905. After ten or fifteen years, the field has 
sharply narrowed . . . one of the leaders is usually out 
front at this stage. . . . Another fifteen years later 
. . . the earlier leader has lost ground appreciably. . . . 
From then on industry leadership tends to become more 
and more widely dispersed. . . ." 

Many tricks are played with statistics in this Wash- 
ington offensive against the "Bigs," who are supposed to 
be getting bigger, while the "Smalls," get smaller. A 
neat one was turned, for instance, by Senator Joseph C. 
O'Mahoney, in the Readers' Digest of April 1949. He 
said "The most exclusive club in the world is . . . the 
"Billion-Dollar Club" . . . corporations with assets of 
more than one billion dollars. In 1929 this "club" had 
20 members; in 1939, 28; in 1945, 40. Today it has 48 
members. ... As such corporations increase in num- 



72 THE "GROWTH OF MONOPOLY POWER" 

bers and in assets, the people, through their city and state 
governments, become less competent to cope with them 
and so turn to the federal government. ..." 

People who live near tideland can see the catch in such 
figures. At five o'clock there may be 20 islands show- 
ing; at 5:05, when the tide has dropped an inch, there 
may be 28 showing, and 20 minutes later there may be 
48 rocks in view. Between 1929 and 1949 the national 
income tripled. If there were not many more corpora- 
tions now with assets of over a billion dollars than in 
1929, it would be a wonder. The Senator could have 
made a much more astonishing statement if he had 
chosen to use gross sales as his measure. In 1929 there 
were only two corporations with gross sales of over a 
billion dollars; 2 by 1949 this figure had jumped to 17. 
This doesn't prove anything more than his figures, how- 
ever. Big-company figures are getting bigger. So is 
everything else. As the farmer in the story said, "Every- 
thing seems to get more so." 

One reason why the big companies don't keep on 
getting so much bigger that they crowd out everybody 
else (as the elephants would, by a version of Darwinian 
theory, in a few generations), is that many of them fail. 
Thus "Of the 100 largest industrial corporations in 1909, 
over 60 were no longer in the giant class in 1935, and at 
least 26 were outright failures. . . ." 3 

But the main reason for disregarding the Washington 
cries about the "growing concentration of industry" is 
that they are chiefly "puff." Scrutinized by the same 
careful standards that the Federal Trade Commission ap- 
plies to cigarette advertising, they would be ruled out of 
bounds in no time. 

They are somewhat like the assertions the government 
lawyers made in the A&P case, to be discussed later. The 



THE "GROWTH OF MONOPOLY POWER" 73 

Antitrust Division lawyers described the A&P picture as 
one of an "ever-broadening . . . spiral of monopoly and 
trade restraint in the hands of A&P." But meantime 
A&P's share of the retail grocery business was dropping 
from around 1 1 per cent to around 7 per cent. 

Another statistical trick sometimes used — and a good il- 
lustration of what statistics can be made to do in the hands 
of those who want to make something out of them — is 
a very simple one. Take the present biggest companies 
in an industry. Add up their share of the industry's 
business. Then compare it with what they did thirty 
years ago. It will always show that they do a larger share 
now than then — no matter what industry is taken or 
how long a period is used. Why? Because today's 
biggest companies are the ones that have grown the most. 
Some of them were unheard of 30 years ago. On the 
other hand some of the greatest among corporations of 30 
years ago are now gone. 



io. Oligopoly 



President Harry Truman wrote, in the summer of 
1949, to the Chairman of the House Judiciary Committee 
saying, 

There is no more serious problem affecting our country and 
its free institutions than the distortions and abuse of our 
economic system which results when . . . whole industries 
are dominated by one or a few large organizations which 
can restrict production in the interest of higher profits and 
thus reduce employment and purchasing power. 

The Chairman of this Committee, Representative 
Emanuel Celler of Brooklyn, New York, said a few 
months later: 

There is a growing tendency for a Big Three or Big Four 
to dominate an industry and throttle competition. . . . 

Where you have these companies that are large, there 
may be a semblance of competition, but actually there is 
very little, because the Big Three or Big Four or Big 
Five or Six don't have to meet in a smoke-filled room to 
fix prices and production. One sets a price and the others 
follow. The effect of a conspiracy of administered price 
is present but there may be no actual agreement or evidence 
of a violation of the Clayton or Sherman Act. 1 

And shortly afterward, the head of the Antitrust Di- 
vision told a Congressional committee: 

Monopoly power in this nation seldom shows up in the 
form of one huge corporation dominating an entire industry. 
Instead it is to be found in those industries controlled bv a 

74 



OLIGOPOLY IS 

few large companies — the Big Threes or the Big Fours — 
following policies and practices which avoid any real com- 
petition among themselves and which at the same time 
enable them to maintain their dominant positions. 2 

These are representative expressions of a type of 
criticism aimed at some industries in the last decade. 

One must note that this is a quite different attack from 
the one discussed in the previous chapter, on the "virulent 
growth' 1 of monopoly power. It is not, here, a claim 
that industry is getting more concentrated; it is a claim 
that (whether it is getting more so or not) it is already 
too concentrated. The two criticisms are often ex- 
pressed together and thus tend to get confused in peo- 
ple's minds. But they must be distinguished carefully 
and considered separately. For it is conceivable that 
even if American industry is not getting more concen- 
trated, it is nevertheless too concentrated. The differ- 
ence is like the difference between whether a man looking 
at a Great Dane should say, "That dog is growing too 
fast" or "That dog is too large anyway" 

The favorite source book of the people who say in- 
dustry is already too concentrated in too few companies 
is the brochure put out by the Federal Trade Commission 
in 1949, already mentioned. 3 The FTC found "extreme" 
concentration in aluminum; tin cans; linoleum; copper 
smelting and refining; cigarette manufacture; distilled 
liquors; plumbing equipment and supplies; rubber tires 
and tubes; motor vehicles; biscuits, crackers and pretzels; 
farm machinery; and meat-packing. It listed primary 
steel as an example of "high though not extreme con- 
centration," with the largest company owning about 29 
per cent of the assets, the largest two 42 per cent and 
the largest six about 63 l / 2 per cent. 

These who say that American industry is "too" con- 



16 OLIGOPOLY 

centrated generally base this criticism on two grounds. 
Their idiom centers around two phrases: "identical ac- 
tion" and "administered prices." Both of these are 
unquestionably commonplace characteristics of those 
American industries where a few companies do a large 
share of the business. Hardly anybody argues over the 
■facts. The argument is over whether they are bad or 
not. For most industrialists who follow the soundtrack 
of this argument feel that the "concentrated" industries 
are on trial for their virtues, not their vices. 

"Identical action" is our old friend matched prices. 
Most businessmen charge the same price for the same 
goods at the same time and, when they change, they 
change en masse. More than that, they generally quote 
prices on the same basis or from the same place, and offer 
the same discounts and charge the same premiums. 
When anybody in the business, who is important, either 
cuts or raises prices, then, either the rest follow along, 
or else the company that made the change gets back 
into line. A company that charges more than its com- 
petitors for the same goods will make money (for a 
time) but lose business, while a company that charges 
less will gain business but lose profits. 

The attack on business for quoting the same prices 
seems to have started in the early 1930's. The then 
Secretary of the Interior, Harold Ickes, wanted to build 
a dam and asked for bids from the cement companies. 
When the bids were opened, they were identical down 
to the penny and decimal point. To most businessmen 
this could mean severe competition. It also, however, 
looks like collusion. To Mr. Ickes it looked like col- 
lusion or conspiracy. He said so quite loudly. 

"Administered prices" take perhaps a little more ex- 
plaining. In the stock market the price of United States 






OLIGOPOLY 77 

Steel or General Motors varies from hour to hour and 
often from minute to minute. The specialists on the 
floor of the New York Stock Exchange who "keep the 
book" on these stocks vary their quotations instantly 
with the ebb and flow of incoming orders to buy or sell. 
This is an "auction market," and its prices might be 
called the opposite of "administered prices." The same 
is true of the prices of cotton futures on the New York 
or New Orleans Cotton Exchanges or of grain futures 
on the Chicago Board of Trade. On the other hand, 
the price of automobiles does not vary from minute to 
minute or even from week to week. It is set by the 
makers, often before the first car of the new model comes 
off the assembly line, after they have carefully figured 
such things as cost, volume, competition, demand, and 
so on. When they have set it, they don't change it if 
they can help it. This is an "administered price." 

Probably more prices are determined this way than 
on the auction basis. Railroad fares and electric power 
bills are computed on the same basis until and unless 
strong forces change them. Wage rates are fixed for 
a year or more. The government itself, at Congress' 
behest, holds the support price or loan value of farm 
products at fairly steady levels. 

Criticizing "administered prices," Mr. John D. Clark, 
one of the three members of the President's Council of 
Economic Advisors, told a Congressional committee, 

Where three or four large firms control 70 per cent or 80 
per cent of the market, each manager knows that market 
price will be materially affected by his decision about the 
volume of his production, and he knows that each of the 
others has the same understanding. Each restrains his im- 
pulse to grow when business is booming and keeps his ex- 
pansion within limits which will protect the market price. 



78 OLIGOPOLY 

When prices weaken, each reduces his production and em- 
ployment rather than his price, confident that each of the 
others will do likewise. 

That may be prudent and it may be good business, . . . 
but it is not the practice of a competitive business . . . 

. . . there need be no collusion. Inherent in the adminis- 
tered-price situation is the failure of the forces of competi- 
tion to work effectively, and the remedy must be found 
by attacking the structure of the industry . . . 4 

"Price leadership," also under attack, is a term easily 
understood. When an industry is under pressure either 
to lower or to raise prices, some leading firm takes the 
plunge and makes the cut or the increase. It isn't always 
followed. Usually it is and the rest of the industry goes 
along. Sometimes a second-string company will make 
the first move. This, too, may be followed, or may not 
be. There have been dramatic cases, throughout the 
last decade, in such major industries as petroleum and 
steel, in which two astute managements have differed in 
judgment on major questions, when the pay-off was price. 
Thus, for example, a few years ago, two leading oil com- 
panies took different views of the prospective supply 
and demand for crude oil. One raised its posted price, 
the other lowered it. Within a few months one proved 
very right, the other very wrong. 

The gist of what the critics of the Big Three's and 
Big Four's claim is that these big companies don't really 
compete with each other, that most of the time they 
charge the same prices, that they do not always cut 
prices to follow down a shrinking market, and that they 
play "follow the leader." 

The Supreme Court has greatly eased the way for this 
idea. It has done this by greatly widening its idea of 
"conspiracy" as this applies to the Sherman Antitrust Act. 



OLIGOPOLY 79 

Section One of the Sherman Act forbids "Every con- 
tract, combination in the form of trust or otherwise . . . 
or conspiracy, in restraint of trade or commerce . . ." 
And Section Two says that nobody ". . . shall . . . com- 
bine or conspire with any other person ... to monopo- 
lize." The Act was thus aimed at "any planned course 
of common action, understanding, agreement, combina- 
tion, or conspiracy" in restraint of trade, as the Federal 
Trade Commission has recently worded it. 

It was originally aimed at the "trusts," as its title in- 
dicates. When people said "trust" in those days it was 
no mere figure of speech or epithet as it usually is today. 
The "trust" was a legal device of the 1880's, as fashionable 
then as handlebar mustaches (but now as obsolete) . Men 
who owned stock in competing companies would turn 
the voting rights in that stock over to a small group of 
"trustees." These trustees could then dictate the poli- 
cies of a whole industry, the usual aim being to hold prices 
steady and choke off ambitious price-cutting competitors. 

These "trusts" were outlawed by the Sherman Anti- 
trust Act, and in a decade or two went the way of the 
buffalo and the dodo. 

For a time, however, they were replaced by such 
things as the "Gary dinners," at which Judge Gary, of 
the United States Steel Corporation, would announce 
what "Big Steel's" price policy would be. The repre- 
sentatives of other steel companies present understood 
that that was to be their policy also — "or else — ." 

The Supreme Court long ago ruled out such trans- 
parent (though fragile) forms of conspiracy, in a number 
of cases such as that of "Trenton Potteries," 5 in which 
the competitors agreed to stick to "fair prices." But it 
still considered legal the common practice in many in- 
dustries in which some company usually has "price 



80 OLIGOPOLY 

leadership" and competitors generally (though not in- 
variably) follow the leader for obvious and above-board 
competitive reasons. For example, in the early 1920's 
the Department of Justice, under Attorney General 
Daugherty, claimed that if competitors charged the same 
prices or used the same methods of quoting prices, this 
was against the Sherman Act; but the Supreme Court 
said no, it wasn't. 6 

But the "new Supreme Court" soon began to show 
quite different feelings. It did so in two ways: by 
broadening its ideas of "conspiracy" and by taking the 
historic brakes off the use of "circumstantial evidence." 

The dictionary defines "conspire" as "1. To make an 
agreement, esp. a secret agreement, to do some act, as 
to commit treason or a crime, or to do some unlawful 
deed; to plot together. ... 2. To concur to work to 
one end. . . ." 7 

As for the rule on "circumstantial evidence," it is 
known to every reader of murder mystery stories. It 
comes down from centuries of Anglo-Saxon common 
law. It is the rule that evidence, to prove guilt, can 
have only one possible interpretation: guilt. It cannot 
have an alternative interpretation: innocence. The hero- 
detective must, when he adds up the evidence in the last 
chapter, show not only that it proves a certain person 
guilty, but that the evidence cannot be added up or 
interpreted in any other way. There must be "no two 
ways about it." And that a man is "innocent unless 
proved guilty" of a crime is a commonplace and is 
common law, in English and American courts. 

But in the Interstate Circuit case of 1939, involving 
an alleged Sherman Act violation, the Supreme Court 
said, "It is elementary that an unlawful conspiracy may 
be and often is formed without simultaneous action or 



OLIGOPOLY 81 

agreement on the part of the conspirators." (This 
prompted three dissenting Justices to say that this "went 
far beyond anything this Court has ever decided.") 8 

Says a New York antitrust lawyer, ". . . similarity 
of action of competitors has never, standing alone, been 
sufficient to sustain a charge of conspiracy. Within the 
past decade, however, the Court has moved more and 
more in the direction of holding conspiratorial any com- 
mon action engaged in by competitors in the same field. 
In the recent Gypsum case this was carried to an ex- 
treme when the Supreme Court held that the mere fact 
that several companies accepted similar license agree- 
ments from a patentee, knowing that other companies 
had accepted licenses containing price control provisions 
under the same patents was . . . prima facie evidence of 
conspiracy . . . if applied to antitrust cases generally 
this rule of 'parallel action' would make the finding of 
conspiracy a matter of rote." 9 

But it was in the Tobacco case 10 that the Supreme 
Court really gave the works to the Big Three's and Big 
Four's of American industry. Since then it is not merely 
the first or leading corporation in an industry, or an 
enterprising monopoly like the Aluminum Company of 
America, which can have the legal rug pulled out from 
under it by the new Sherman-Act interpretations. In 
any given industry not only the first but also the second, 
third, and perhaps (lawyers are not sure) even the tenth 
or twentieth biggest company can now, it seems likely, 
be caught in the drag-net of a "monopoly-power" charge. 

The Tobacco case was in some senses a confusing one. 
The three biggest cigarette companies, American To- 
bacco (Lucky Strike), Liggett & Myers (Chesterfield), 
and R. J. Reynolds (Camel), were indicted in Kentucky 
in the tobacco-farming country, where a jury found 



82 OLIGOPOLY 

them guilty, under the Sherman Act, of conspiring to 
restrain trade. The case did not go up to the Supreme 
Court on the conspiracy charge at all. It went up on 
the single question, already discussed in Chapter 8 of 
whether the possession of power to exclude competitors 
was enough to violate the Sherman Act. But the Su- 
preme Court, as some antitrust lawyers in New York 
put it, apparently "went out of its way" to discuss also 
the conspiracy charge, and to give the jury-finding its 
blessing. 

The Court stated, "This particular conspiracy may well 
have derived special vitality in the eyes of the jury, from the 
fact that its existence was established not through ... a 
formal written agreement, but through the evidence of 
widespread and effective conduct on the part of (the com- 
panies) in relation to their existing or potential competitors 
. . . entirely from circumstantial evidence, the jury found 
... a combination or conspiracy. . . . No formal agree- 
ment is necessary to constitute an unlawful conspiracy. . . . 
The essential . . . violation of the Sherman Act may be 
found in a course of dealings or other circumstances as well 
as in an exchange of words. . . " 

And then the Court added: "With this background 
of substantial monopoly [italics added], amounting to 
over two thirds of the entire domestic field of cigarettes 
. . . and with the opposition confined to several small 
competitors, the jury could have found from the actual 
operation of the [companies] that there existed a com- 
bination or conspiracy among them not only in restraint 
of trade but to monopolize a part of the tobacco indus- 
try ..." Friends and foes of business seemed to agree 
on what the Supreme Court meant in this case. 

Said a critic of American business, as it is now or- 
ganized, "With revolutionary speed . . . the doctrine 
of the Sherman Act has lately been transformed. . . . 
When three companies produce so large a percentage of 



OLIGOPOLY 83 

market supply, that fact alone is almost sufficient evi- 
dence that the statute is violated. Ruthless and preda- 
tory behavior need not be shown. The actual elimina- 
tion of small competitors is unnecessary. The big 
tobacco companies, in the final analysis, pursued a policy 
which increased the number of their independent com- 
petitors and on balance strengthened [these competi- 
tors'] positions. [But] parallel action, price leadership 
. . . and, above all, size — these are now key points 
to be proved . . . the content of an antitrust case has 
been enormously limited and simplified. . . . Pain- 
staking search for scraps of evidence with a conspiratorial 
atmosphere are no longer necessary. . . . The immedi- 
ate question is whether competitive reorganization . . . 
can now be required for the numerous industries which, 
like the tobacco industry, are dominated by a small num- 
ber of large units. Steel, automobiles, petroleum, non- 
ferrous metals, chemicals, motion pictures, electrical 
equipment — most of the basic areas of the economy — 
are organized along lines which broadly resemble the 
pattern disapproved in the Tobacco case. . ." n 

Or in other words, as a corporation lawyer in New 
York put it, this interpretation would mean "the wreck- 
ing and rebuilding of the economic pattern in from 
one-third to three-fourths of our entire industrial econ- 
omy . . ." 12 

There has to be a word for everything. If there isn't, 
someone invents one. Washington lawyers and econo- 
mists have invented one for the situation of Big Three's, 
Big Four's, and so on, which goes in most American in- 
dustry. They call it "oligopoly ." It comes from the 
Greek roots oliyog meaning "few," as in "oligarchy," 
meaning "rule of the few"; and noHw meaning "sell," 
as in "monopoly" — single seller. "Oligopoly" means "a 
few sellers." 



ii. Concentration and 
Competition 



When the economists of the Federal Trade Commis- 
sion wrote their study on industrial concentration, they 
probably did not realize how much it would become a 
bible to the critics of American business. It has become 
almost a "must" reading for many Congressmen and 
government officials; and they quote its figures almost 
like a gospel. 

The FTC economists also, however, probably did not 
realize how carefully New York economists would ex- 
amine this report. It has been gone over as "with a 
fine-tooth comb." And unsympathetic economists have 
made some criticisms. They say it does not prove as 
much as it is supposed to. What the FTC economists 
reported was, in effect, that in a great many industries 
a handful of companies, or even two or three, do most 
of the business, or at least, own most of it. Critics, how- 
ever, take exception to some of the FTC statistics. 
They say they are slanted. 

There are two major ways of measuring and com- 
paring corporations. One is by the amount they sell; 
the other by the amount of property they have. By the 
first measure, the Great Atlantic & Pacific Tea Company 
is a very large company; it sells almost three billion dol- 
lars of groceries a year. By the measure of assets, or 

84 



CONCENTRATION AND COMPETITION 85 

property, A&P is a pint-sized outfit; its total assets are 
somewhere around 100 million dollars. In contrast rail- 
road, electric power, and telephone men, to do three 
billion dollars of business a year, must have assets of 
more nearly ten billion dollars. 

The FTC economists, on page 5 of their report, re- 
marked that if they compared companies by assets they 
would show more "concentration" than if they compared 
them by sales. They used assets. On later pages, they 
showed that big companies tended to have less invested 
in inventory than in plant. They excluded inventories. 
To mention it may be captious, but still another mis- 
leading statistical method, used by FTC, should be noted. 

"To take an example," says the FTC report, page 7, 
"General Motors Corporation is engaged in a number 
of industries — motor vehicles . . . refrigerators . . . 
Diesel locomotives, etc. Yet its financial figures are 
available only for the corporation as a whole. Accord- 
ingly, since the production of automobiles represents its 
principal activity, its total net capital assets . . . must 
necessarily be classified in one industry — motor vehicles." 

B. Bradford Smith, economist for the United States 
Steel Corporation, has said, 

This introduces a cumulative statistical error . . . thus 
in a first industry an asset figure is used for larger com- 
panies that is bigger than the assets those companies actually 
employ in that . . . industry . . . while, at the same time, 
the . . . size of a second industry is reduced, leaving a 
smaller base with which to compare the assets of the bigger 
companies in that second industry. The error does not 
compensate as between industries but cumulates. 1 

The FTC economists did another thing with their 
figures which, for the offhand reader, makes American 
industry look "worse" in the sense of being more con- 



86 CONCENTRATION AND COMPETITION 

centrated. They defined "industry" very narrowly and 
based their figures either on small industries or on parts 
of large industries. 

Thus, perhaps by coincidence, they discussed "Carpets 
and Rugs" as one industry, and on the next page "Lino- 
leum" as another. They showed that six companies had 
two-thirds of the net capital assets in "Carpets and Rugs" 
and that five companies accounted for 94% per cent of 
the net capital assets in the "Linoleum" industry. Had 
they, of course, taken "Floor Coverings" as an industry 
of which to measure the "degree of concentration," the 
figures would have been much smaller and so looked 
much less alarming. 

In fact, on this same line, a statistician can show almost 
any degree of industrial "concentration" he wants, 
simply by narrowing down his definition of an "indus- 
try." If, for instance, one drew a line around something 
called "the food industry," the degree of concentration 
would be very small. But the FTC economists took, in 
this industry alone, "A4eat products," "Canning and pre- 
serving," "Grain mill products," "Bread baking," "Bis- 
cuits and crackers," and "Dairy products." They found 
high figures of concentration in each one. But, as a 
New York economist has pointed out, if one were to 
define an automobile so narrowly that only a Lincoln 
would fit the definition, then one could find a 100 per 
cent concentration without more ado. Only one com- 
pany makes Lincolns. 

In the last analysis, the fair test of an industry is 
"who competes with whom?" And you can go as far 
toward enlarging the definition of an industry as the 
FTC men went in narrowing it. Oil, bituminous coal, 
and natural gas, for instance, could be lumped as the 
"fuel business," since they compete; and the "bagging 



CONCENTRATION AND COMPETITION 87 

industry" could include both the coarsest counts of cotton 
and the heaviest products of the kraft paper business, 
which have now been for many years locked in the most 
strenuous competition. 

Economists have another serious criticism of the FTC's 
report, not of the figures, but of the implication some 
people draw from them. The implication is, of course, 
"the more concentration, the less competition." But 
B. B. Smith comments that the FTC studies "do not tell 
us nearly as much about competition, as distinguished 
from concentration, as we would like to know. The two 
are not the same. . . . There could, for example, be 
one producer of a given product in each state, each en- 
joying a statewide monopoly, and the statistics as com- 
piled by the government would show comparatively 
little concentration. On the other hand, there could be 
only four producers competing everywhere on a nation- 
wide scale and the government statistics would show 100 
per cent concentration in four companies. 

"The concentration ratios would thus convey impres- 
sions that were the exact opposite of the truth as far as 
competition is concerned. 

"Nor is this just a theoretical criticism. For it is, in 
fact, the larger companies whose distributions of prod- 
ucts reach out, overlap each other, and thus multiply 
the choices available to buyers. 

"There is the possibility that the [FTC's] concentra- 
tion ratios mean the opposite of what they seem to mean 
in so far as competition is concerned . . ." 2 

And on the same subject, Peter B. Drucker recently 
wrote: 

According to the old yardstick the building industry is, 
for instance, a highly competitive one; individual building 
contractors are in sharp competition with each other for 



88 CONCENTRATION AND COMPETITION 

business. Measured by the new yardstick of "workable 
competition," however, the building industry would hardly 
pass muster; no matter how competitive in behavior, build- 
ing does not give the consumer too much of the effects of 
competition. 

It lacks the "controls" without which competition is 
unlikely to be "workable" — in this case, companies large 
enough to push toward a mass market, to develop new and 
better ways of building, and to be able to operate on a low 
profit margin per unit. . . . 3 

At no point in the FTC's study of industrial concen- 
tration do the writers actually claim that the more "con- 
centrated" industries are less competitive. They merely 
take it for granted. 4 If they could have made any reason- 
able case to this effect, it seems likely that they would 
have done so. But actually, it seems to work the other 
way. Thus, for instance, the FTC, in reporting on 26 
"industries," said it found "extreme concentration" in 
13 of them. These 13 included aluminum; tin cans; 
linoleum; copper refining; cigarettes; distilled liquors; 
plumbing equipment and supplies; rubber tires and tubes; 
office machinery; automobiles; biscuits, crackers and 
pretzels; farm machinery; and meat-packing. But the 
public has certainly been well served by these industries. 

Thus two of these industries have had for at least a 
generation among the best price records of American 
industry: rubber tires, and primary aluminum. Again, 
the price of copper is no higher than it was a genera- 
tion ago. The farm tractor industry has been enough 
different from the story-book "monopoly" to have in- 
creased the number of tractors on American farms in 
the last 30 years from about 250,000 to nearly five mil- 
lions. The technical achievements of the automobile 
industry are too well known to need telling. If these 
industries are examples of "dangerous" concentration, as 



CONCENTRATION AND COMPETITION 89 

the saying goes, the danger does not seem to be to the 
consumer or to the public. 

Most people are familiar with some industries that are 
highly "concentrated," yet highly competitive. They 
know, for instance, about the recent battle in the phono- 
graph record business and in television. Both industries 
are highly concentrated. The platter business is, in 
Washington idiom, "dominated" by the "big three" — 
Columbia, RCA Victor, and Decca. And in television, 
five companies do 70 per cent of the business. And be- 
fore the fight is over the "concentration" will probably 
be even greater. Yet in the phonograph business, the 
year 1949 saw a hectic struggle. Said the Wall Street 
Journal on August 23, 1949, "The war of the phono- 
graph records has entered a new phase. Truce attempts 
have broken down and new alliances are shaping up for 
a fiercer showdown battle. The struggle, as everyone 
knows by now, is between two 'revolutionary' kinds of 
record." 

In the television business, there was slashing competi- 
tion during the recession year 1949 and steady price- 
cutting and product-improving competition have been 
the general rule, ever since the Federal Communications 
Commission granted new station permits in March 1947. 
Notable, in the brief history of this young industry, has 
been the rise of a corporate "nobody," named Motorola, 
to a position among the "dominant" firms in video, in the 
face of competition from such well-known veterans in 
the electrical equipment industry as General Electric and 
Westinghouse. 

The automobile industry, an outstanding example of 
"concentration," is as competitive as ever. In its earlier 
days the Ford people pulled far ahead of everybody else. 
Then, when the Model T faded, they lost this place. 



90 CONCENTRATION AND COMPETITION 

Chrysler came up. General Motors became the chief 
producer. Recently Ford has been gaining again, Stude- 
baker has been moving up and some other producers 
have been sliding back in the competitive race. 

The soap business has been heavily attacked in recent 
years in Washington for undue "concentration." But 
meantime, it has been the scene of a titanic three-way 
battle between Procter & Gamble, Colgate, and Lever 
Brothers. Oxydol, Super-Suds, Tide, Dreft and Vel 
have been swirled in competition as the new detergents 
have been put on the market. A year ago, according to 
the Wall Street Journal of January 25, 1950, "the sharp- 
est defeats . . . have been suffered by Lever, and the 
biggest single victory has been won by Procter & Gam- 
ble." But such report carries no more permanence than 
a three-star story of a World Series fourth inning. 

But the competition within these easily defined "indus- 
tries" is, if anything, exceeded in intensity by the com- 
petition which has developed between industries which 
were, until recently, total strangers to each other. 

Thus for instance the New York Journal of Commerce 
said recently, 

There has been so much talk of competition among textile 
fibers in recent years that it has tended to obscure the 
potential effects upon the industry of non-textile materials. 
The rising use of synthetics in former cotton and wool 
markets has focussed considerable attention upon these in- 
roads . . . [but] other materials have made inroads of a 
substantial nature . . . the increasing use of plastic film and 
sheeting, paper and metals, in fields formerly thought of as 
exclusively textile, may have a much more profound in- 
fluence upon the industry than the inter-fiber competi- 
tion . . . 

For another example, the petroleum, natural gas, and 
soft-coal people are now locked in competition, particu- 



CONCENTRATION AND COMPETITION 91 

larly over home-heating and heavy industrial markets* 
Also there is competition between the railroads and the 
air lines for the passenger dollar, and between the post 
office, Western Union, and the long-lines service of the 
American Telephone & Telegraph Company for the com- 
munication dollars of businessmen and sweethearts. 

The president of the du Pont company recently re- 
marked: 

... in most of the fields in which the du Pont Company 
has a position of importance it is confronted with the most 
rugged . . . competition. . . . Du Pont manufactures 
paints and lacquers. . . . There are 1200 producers in this 
field and . . . Sherwin-Williams is larger in this field than is 
du Pont. . . . American Viscose is larger in the viscose field 
. . . and Celanese in the acetate field. Du Pont makes 
photographic film; but Eastman makes more. And so it goes 
right on down the line . . . nylon must compete with wool, 
cotton, silk, rayon, and other synthetic fibers . . . cellophane 
. . . had to compete with paper, glassine, metal foils, and 
plastics . . . [but] a new wrapping material better than 
cellophane or . . . costing less, could change the situation 
rapidly. . . . Competition is far from dead and it is our 
belief that in coming years it will become even more in- 
tense . . . 

"You know," remarked the president of the United 
States Steel Corporation, apparently exasperated at the 
sniping remarks of Washington Congressmen about the 
lack of competition in his and other leading American 
industries, "sometimes I wish these critics could join our 
sales force for a few weeks and try to sell a little steel. 
I think they would find out for themselves what compe- 
tition really is." 5 

The sales managers, advertising heads, vice-presidents r 
board-chairmen, and others of the big companies' official- 
dom, who have helped lift their firms to "dominant" 



92 CONCENTRATION AND COMPETITION 

positions in the ceaseless competition that has made Amer- 
ican industry the power it is, all seem to feel that there 
is "no rest for the weary." Some of them, in fact, sound, 
or even look, a little weary themselves. But there is no 
rest for them. Competition in this country is getting, 
as the years roll by, not less strenuous, but more so. 



n. Monopolistic Competition 



The historian of perhaps 1980 will report, among the 
intellectual oddities of the 1930's and 1940's, the phrase 
"monopolistic competition." In a sense, this phrase 
means nothing at all, like "loveless love." Monopoly is 
the absence of competition and competition is the ab- 
sence of monopoly. But in another sense it means a 
great deal and is heavily charged with emotion. It is, 
in the last analysis, an epithet hurled against the Big 
Three's and Four's of American industry. The profes- 
sors, Congressmen, and government officials who use it, 
though they often profess to be objective about it, seldom 
"smile when they say it." For it is the verbal epitome 
of their desire to reorganize American industry. It 
spearheads their attack on the structure of business as it 
has developed in this country. It points up the wish, 
as Omar Khayyam put it: 

Ah Love! could you and I . . . conspire 

To grasp this sorry Scheme of Things Entire, 

Would we not shatter it to bits — and then 
Re-mould it nearer to the Heart's desire! . , . 1 

Back of the phrase "monopolistic competition" is the 
idea that when three or four companies do most of the 
business in an industry, that industry is not likely to be 
"really" competitive. The men who use this phrase feel 
that the men who run leading companies use their power 
to soften competition. And, in such mood, they criti- 

93 



94 MONOPOLISTIC COMPETITION 

cize the most basic habits of American industrialists. 
They are, in fact, so deeply critical that the businessmen 
who have time to study their criticism sometimes con- 
clude that they, themselves, can "do no right," and that 
whatever they do, they are "damned if they do and 
damned if they don't." 

There are three basic criticisms of American business 
which go with the phrase "monopolistic competition." 
They are "identical pricing," "administered prices," and 
"price leadership." They are all true. The issue is not 
over the facts, but over their meaning. These criticisms 
say, in effect, that in certain industries businessmen 
charge the same prices, do not change these prices as 
often as they should, and follow the leaders. This is 
bad, because it means that these industries are not truly 
competitive. Businessmen find it hard to deny the 
charges, but they seldom subscribe to the conclusions. 

On "identical pricing," a group of New York lawyers 
recently wrote to the Secretary of Commerce in Wash- 
ington that "From our observation there is no contention 
that creates greater uncertainty and sense of helpless in- 
security among businessmen than that 'conscious simi- 
larity' (of pricing) is in itself unlawful. There is nothing 
that creates more of a question in the mind of the public, 
whether justified or unjustified, than the prevalence of 
the phenomena of similarity." 2 

Two lower federal courts have made interesting com- 
ments in this connection. Said Judge Major in the 
Cement case, 3 ". . . The charge of combination is little 
more than a pretense to get all the members of the in- 
dustry . . . before the same Court. . . . These two 
competing mills are faced with a simple business proposi- 
tion. . . . Each can confine its sales to the territory in 
which it has an advantage or can extend its business into 



MONOPOLISTIC COMPETITION 95 

the territory of the other. If . . . the former ... as 
the [FTC] would require . . . each will have a mo- 
nopoly of its own territory, and competition will be at 
an end. On the other hand if . . . they go into the terri- 
tory where they are at a disadvantage freightwise, they 
necessarily must meet the price which they find there in 
order to sell . . . cement is sold at all points of destina- 
tion at an identical price and . . . bids to the govern- 
ment have oftentime been made in identical amounts . . . 
the same result would ensue as the result of any pricing 
system and whether used individually or in combina- 
tion. 4 . . . 

". . . we think it is the inevitable result of any pricing 
system that cement must be sold at the same place at a 
uniform price ... If one producer persists in selling 
for more than the others, his customers will be lost. If 
he sells for less, the others will be compelled to lower 
their price to the same level or forego the business . . ." 5 

More recent is the St. Louis milk case. 6 The Pevely 
Dairy Company and the St. Louis Dairy Company did 
63 per cent of the fluid milk business in St. Louis. They 
were competitors, selling the same kind of milk in the 
same area and almost always at the same price. Said the 
Circuit Court, 

The circumstantial evidence relied upon as sustaining the 
verdict [against the companies in the lower court] consists 
of the uniformity of the prices charged . . . and the prox- 
imity in time of the price changes listed in the indictment 
and bill of particulars. . . . 

. . . For each of the price changes charged . . . detailed 
evidence was furnished concerning the economic reasons 
. . . and shown to have resulted from economic conditions. 
. . . The milk . . . was a standardized product. Its cost 
items being substantially identical for both appellants, uni- 
formity in price would result from economic forces. Econ- 



96 MONOPOLISTIC COMPETITION 

omists called as expert witnesses testified that in a market 
such as the fluid milk market in St. Louis . . . uniformity 
of price is to be expected . . . 

In an article entitled "Collusion," appearing in the Decem- 
ber, 1948, issue of Farm Economics, published by the Depart- 
ment of Agriculture Economics of the New York State 
College of Agriculture, appears the following: 

"There is nothing peculiar in the fact that a change in 
the price of wheat or cotton occurs simultaneously in all 
markets. If the price of No. 1 Northern Spring Wheat in 
Minneapolis rises 5 cents a bushel, it advances 5 cents in 
Baltimore, 5 cents in Buffalo, 5 cents in Chicago, and 5 cents 
in all the small towns in Minnesota, North Dakota and Mon- 
tana. These prices not only all advance by the same amount, 
but ... on the same day. This is as it should be. There 
is no collusion. Under the free enterprise system, competi- 
tion forces all handlers to pay the same price." 

These economic principles must of necessity be recognized 
by the courts. Thus, in Cement Manufacturers' Protective 
Association v. United States, 268 U.S. 588, 45 S.Ct. 586,592, 
69 L.Ed. 1104 . . . Justice Stone, speaking for the [Su- 
preme] Court . . . said . . . "the fact is that any change 
in quotation of price to dealers, promptly becomes well 
known in the trade through reports of salesmen, agents, and 
dealers of various manufacturers. ... A great volume of 
testimony was . . . given by distinguished economists in 
support of the thesis that in the case of a standardized prod- 
uct sold wholesale to fully informed professional buyers . . . 
uniformity of price will inevitably result from active, free 
and unrestrained competition. . . ." 

And so the Court concluded, in the Pevely case, that it 
was "clear that mere uniformity of prices in the sale of 
a standardized commodity such as milk is not in itself 
evidence of a violation of the Sherman Antitrust Act." 
The Supreme Court refused the Antitrust Division's re- 
quest that it review this case. 

The constant refrain of the Federal Trade Commission 
lawyers about the allegedly sinister meaning of identical 



MONOPOLISTIC COMPETITION 97 

or matched prices produced the following comment from 
a New York economist: 

Two contradictory truisms seem to have run through 
the debates of the last few months ... (1) Prices are 
matched in every market. How could it be anything but 
collusion? That seems to be the refrain of the Commission 
... (2) We are dealing with an identical and widely used 
product. How could it ever be sold at any but an identi- 
cal price? Who would pay more? . . . When could col- 
lusion not be inferred? Would an industry be saved by a 
little deviation in price of terms? Economically, this would 
be of no significance. Would it be saved by a major devi- 
ation? Such deviation would be met, I believe, and com- 
pletely. There might be a sparring period, but it would be 
met . . ? 

And the Secretary of Commerce said on this subject 
that "Mere similarity or so-called 'parallelism' of action 
should not be penalized unless . . . based upon collusion. 
Parallelism is likely, in a normal competitive situation, 
to result from informed competition. Similar condi- 
tions result in similar action if there is adequate knowl- 
edge. . . ." 8 

An outsider, however, may think prices consistently 
identical, but this isn't always true. Thus, for in- 
stance, the sales manager of the United States Steel 
Corporation recently said, ". . . Published [steel] prices 
always have and still do differ to a marked extent between 
competing producers. . . . Actual prices . . . fre- 
quently vary from published steel prices. Quality, avail- 
ability, and service, as well as price, are decisive factors 
. . ." And he added the unpleasant, but understand- 
able, remark that "Those who apply such terms [as 'olig- 
opoly,' 'price leadership,' and 'administered prices'] 
simply are not conversant with the facts. . . . The steel 
business is highly competitive. . . . The disagreement 



98 MONOPOLISTIC COMPETITION 

between the practical men of business and those who rely 
on theories about competition largely arises from a differ- 
ence in information and of interpretation, based on 
knowledge in the first instance and superficial misin- 
formation in the second. . , ." 9 

A touch of humor has been tossed into the "identical 
pricing" picture by the perennially ironical Federal Trade 
Commissioner Lowell B. Mason. He said: 

Be sure you don't know your competitors' prices. . . . 
This is difficult. What happens when one of your salesmen 
walks into a store and offers a retailer one of your 1948 
models of rubber-mounted shaving mugs at $13.75 the dozen? 
The first thing the purchasing agent says is, "Why, you poor 
so-and-so, Glutz is selling his mugs for $12.95." 

This means the jig is up. For ... if you come down 
to $12.95, you are matching competitors' prices, and that . . . 
if carried out systematically, results in a conscious paral- 
lelism which ... is tantamount to a conspiracy. 

There is, however, a way of getting around this difficulty. 
Equip all your salesman with earmuffs . . . my apparent 
flippancy is but the cry of a man who sees in these cases the 
seed of internal decay for our distribution system . . . 10 

"Price," said a well-known New York financial writer 
recently, "is but one of countless forms in which com- 
petition expresses itself, and in many cases one of the 
least consequential." n 

And a Washington antitrust lawyer recently remarked 
on this "underlying economic theory . . . that price 
alone determines selling. Perhaps this is always true. 
But . . . if it is, a great deal of liquor has been poured 
by salesmen to no good purpose . . ." 12 



13. Administered Prices 



The critics of the larger American companies com- 
plain that these companies, in "concentrated industries," 
do not really compete. They start with an ideal of 
"pure competition" and they find that the sales man- 
agers in the larger companies fall far short of it. 

In this imaginary "pure competition," there would 
have to be a large number of little companies, all selling 
just about the same product. Nobody would have any 
control over the price he could charge. "The market" 
would be a thing in itself. Producers would simply sell 
for all they could get, everything they could produce 
at that price. If the competition in such a market was 
"pure" enough, nobody would even use salesmen, put 
out advertising or use brand names. Selling in such a 
market would be something like selling 80 x 80-count 
print cloth in the Worth Street market, or even like 
selling a thousand shares of "Steel" "at the market," 
or 10,000 bushels of March wheat on the Chicago Board 
of Trade. 

The political objection, in this ideal, seems to be that 
any industry that falls short of it can be criticized as 
practicing "impure" or "imperfect" competition. And 
that sounds like monopoly — or "monopolistic competi- 
tion." It's illegal. For the opposite, or negative, of 
competition, is monopoly. But the number of indus- 

99 



100 ADMINISTERED PRICES 

tries which sell by this ideal "pure competition" is almost, 
if not, totally nonexistent. 

Thus, one of the President's three Economic Advisors 
recently told a Congressional Committee: 

Where three or four large firms control 70 per cent or 80 
per cent of the market, each manager . . . restrains his 
impulse to grow when business is booming and keeps his 
expansion within limits which will protect the market price. 
When prices weaken, each reduces his production and em- 
ployment rather than his price, confident that each of the 
others will do likewise. That may be prudent and it may 
be good business . . . but it is not . . . competitive busi- 
ness. . . . Inherent in [this] administered-price situation 
is the failure of the forces of competition to work effectively, 
and the remedy must be found by attacking the structure 
of the industry. . . .*■ 

But the figures don't seem to bear this out. Ten years 
ago a government economist made a careful study of 
407 separate manufacturing industries, as to price, output, 
and degree of concentration. 2 He took his figures chiefly 
from the U. S. Census of Manufactures, for two separate 
periods: the decline between 1929 and 1933 and the 
recovery between 1933 and 1937. He did not find that 
it was so. 

". . . There appeared," he said, "to be no strongly marked 
relation between . . . concentration . . . and . . . quan- 
tity and price behavior; high and low concentration and 
large and small changes in price and quantity appeared to- 
gether almost as if by chance . . ." 3 

A Boston economist has since then gone over the same 
question. He went the government man one further 
and looked into sellers' "unit direct costs." His con- 
clusion was 4 ". . . that concentration cannot, as alleged, 
be considered to exercise a significant influence during 
depression on either price behavior, production behavior, 



ADMINISTERED PRICES 101 

or price-production behavior for individual industries 
taken separately . . ." 

In the middle 1930's an economist in the U. S. Depart- 
ment of Agriculture set a style in Washington economic 
thinking with a pamphlet which said that the hard times 
of the 1930's were mostly because industry was getting 
more concentrated and managers in concentrated indus- 
tries preferred to cut production instead of cutting 
prices. 5 This fast became economic "party-line" in 
Washington. President Roosevelt used the idea in his 
1938 message asking Congress to look into "the concen- 
tration of economic power in American industry." And 
it is what Dr. Clark was saying in 1949. 

Said Dr. Means, "The basic cause for the failure of 
a laissez-faire policy is . . . [that the] shift to adminis- 
tration has brought . . . inflexible administered prices 
which disrupt the workings of the market. . . ." 6 But 
while Washington economists and politicians promptly 
bought this idea, New York economists quickly swarmed 
over it. And they soon found what seem to be 
errors. 

A well-known New York economist soon pointed out 
that Dr. Means had "made no attempt to compare price 
movements in the present depression with those in previ- 
ous depressions," and that "if he had ... he would have 
found that rigid prices always existed; that to a very large 
extent they were characteristic of the same articles of 
which they are now characteristic, and that there is even 
very strong reason to believe that a hundred years ago, 
when John Stuart Mill was writing his "Principles of 
Political Economy," rigid prices were proportionally 
more numerous and more important to the consumer than 
now . . . 7 

The fact is that rigid prices have always been important. 



102 ADMINISTERED PRICES 

Were the classical economists aware of that fact? A study 
of their texts makes it impossible to doubt that they were. 
Adam Smith very plainly stated "that the price of linen and 
woolen cloth is liable neither to such frequent nor to such 
great variations as the price of corn [wheat], every man's 
experience will inform him." . . . there is strong reason to 
believe that competition has more nearly approached the 
theoretical idea in recent years than ... in the time of 
Smith and Mill. ... It was . . . common knowledge that 
wages did not fluctuate with the price of commodities; that 
manufactured goods and agricultural goods did not move to- 
gether; that the price of bread . . . did not change as much 
as the price of wheat . . . 

Naturally, the records show that prices of manufactured 
goods remain unchanged for months at a time, while prices 
of farm products vary daily. . . . Manufacturers are com- 
pelled to announce in advance what they expect to charge, 
frequently before they have any product ready for sale. 
They have to inform their salesmen and dealers and in some 
cases the buying public. They print price lists and adver- 
tisements. Necessarily prices so announced cannot be 
changed frequently. . . . 

. . . Whether the discovery by certain economists and 
politicians of a phenomenon that was common and gener- 
ally known in the eighteenth century is justification for 
discarding an economic system ... is a question every 
economist must answer for himself. In my opinion it is 
no more important . . . than the discovery by Moliere's 
bourgeois gentilhomme that he had been speaking prose all 
his life. 

Administered prices are perfectly consistent with active 
competition. They have been common and in fact neces- 
sary in certain types of industry for centuries. Throughout 
our history some prices have changed rapidly, others at 
longer intervals. . . . These differences in price-behavior 
have not been the effect of monopolistic practices or large- 
scale operations, but of differences in the nature of costs. 
... if costs consist largely of payments for materials and 
hired labor the extent to which they can be reduced is 
limited by forces usually beyond the seller's control. But 



ADMINISTERED PRICES 103 

if they consist largely of overhead or other deferrable items, 
or payments for the producers' own services, as in farming, 
prices can be reduced, and in some cases the reduction may 
have enough effect on demand to remove the necessity of 
cutting down output. . . . 

Thus the people who use what might be called the 
"Mexican jumping bean" theory of industrial prices are 
hardly being fair to businessmen. They seem to expect 
businessmen to produce price "jiggles" in all directions 
at all times. It is an impatient view. These critics seem 
to feel that because businessmen do not compete like 
tennis-players (which they seldom do) but like chess- 
players (which they usually do) they are not "really" 
competing. The critics are in a hurry for action. But 
it takes some time to see the moves in the game of business 
competition, as in the game of chess. Moves, however, 
there are and, over "the long term," the patient observer 
will often find them dramatic. 

But this brings up another point at which the critics 
complain. It is the point where someone in an industry, 
usually one of its most successful companies, takes "price 
leadership" and makes one of these important occasional 
moves. Said a federal Circuit Court judge in a recent 
case, "Price leadership is implicit in any pricing system. 
It inevitably exists where one or more members of an 
industry occupy a commanding position because of their 
strength and magnitude. . . . 8 

An interesting example of how price changes happen 
is the following story as related by the capable petroleum 
editor of the New York Journal of Co?nmerce, Wanda 
Jablonski. 9 

Price developments in the oil industry on the East coast 
in the past few weeks serve to illustrate once again one of 
those economic ideas that sound fine in theory but don't 
always hold much water in practice. 



104 ADMINISTERED PRICES 

The Federal Trade Commission and some economists 
have been advancing the theory that parallel price action by 
a group of companies — especially upward — constitutes proof 
per se of monopolistic behavior. . . . Closer observation, 
however ... in actual practice — rather than in theory — 
indicates quite a different explanation. 

At the beginning of August Esso Standard raised heavy 
fuel prices 10 cents along the seaboard. . . . Within a 
short time Socony- Vacuum and other suppliers followed 
the rise. "Collusion," according to some theories. 

Later that month Socony advanced light fuel oils. Some 
days later Esso also increased light fuels, but by amounts 
smaller than the Socony rise at most points. Within a few 
days Socony was forced to cut back its price to the Esso 
level. Collusion? 

Last week Socony once more advanced light fuels. After 
studying the market a week Esso yesterday also announced 
an advance — but again by smaller amounts. . . . Again 
Socony will have to readjust back. . . . Collusion? 

When an important competitor raises his price, the reasons 
for following . . . can easily be traced to what might be 
termed competitive horse sense. . . . 

In the first place, a company does not usually announce 
a price rise until it is convinced that market conditions . . . 
warrant an advance and that the same factors are affecting 
. . .its competitors. With experience and first-hand knowl- 
edge of the market, it is more often apt to guess right than 
to guess wrong. 

Secondly — and this is the crux — most sellers are naturally 
interested in making profits, and therefore usually have an 
incentive to follow a price rise announced by a strong com- 
petitor — unless this is offset by a competitive advantage to be 
gained by not raising. 

However, sellers know from years of experience that 
the competitor which initiates a price rise watches market 
reaction like a hawk, and has no intention of letting others 
swipe his customers by offer of the lower price . . . the 
moment the initiating company finds its competitors trying 
to do so it will rescind its increase — and do so retroactively 
if need be to hold the customer ... 



ADMINISTERED PRICES 105 

A leading oil man has said: 

The so-called price leadership in the petroleum industry 
boils down to the fact that some company in each territory 
most of the time bears the onus of formally recognizing 
current conditions. . . . [But] the executives of the lead- 
ing marketer . . . are always in danger of taking a step 
with which competitors will not agree, with the penalty 
for misjudgment a sharp reduction in profits unless the mis- 
judgment is rectified at once. 

In short, unless the so-called price leader accurately inter- 
prets basic and local conditions, it soon will not be the lead- 
ing marketer. . . . 10 

"Those who claim," said a cabinet officer recently, 
"that competition does not exist between giant firms do 
not know what they are talking about. The competi- 
tion which goes on between large business organizations 
is as real as the struggle between contending armies in 
war. The very size of some units may give the im- 
pression that they are not struggling — are carried along 
by their own momentum. But if any concern ceases 
to compete, or isn't continually on its toes, the result 
in sales shows up promptly. . . ." ll 

"A genuine monopoly," said an economist recently, 
"is very much more difficult to establish, let alone to 
maintain, than we used to be told . . . one can no longer 
assume that the business man is driven by his own self- 
interest into monopolistic behavior. On the contrary, 
his self-interest must lie in maintaining, if not expanding, 
his share of the total consumer purchasing power — an aim 
which will tend to deter him from restricting production 
and raising prices, as the traditional theory of monopoly 
insisted he would do." 12 

But perhaps the Wall Street Journal hit the nail on the 
head even more succinctly as to the reason why American 
businessmen compete, when it said editorially "we think 



106 ADMINISTERED PRICES 

that the best safeguard against monopoly is that Ameri- 
cans are not monopoly-minded. They will compete 
[even] when there is nothing to compete against." 13 

An odd aspect of the "administered price" story has 
appeared since V-J Day in the spread between mill prices 
and "gray market" prices. Mill-men in steel, paper and 
pulp; automobile, chemical, and other manufacturers have 
been selling at what they considered "fair" prices rather 
than at "market" prices. Steel has been selling in "gray 
markets" at as much as three times these mill or producers' 
prices. These gray market prices are the result of "pure 
competition." They are "the market" that results from 
the balance between what buyers will pay and holders 
can hold out for. The mill prices are strictly "ad- 
ministered prices." They are lower. 



14. Integration 



In the last couple of decades, businessmen have gone 
in for "industrial integration" as psychiatrists have gone 
in for "emotional integration." "Integration" means 
making things one; or in other words putting things to- 
gether, and thus avoiding conflict. 

Businessmen have put the same kind of businesses to- 
gether — "horizontal integration," like a string of bak- 
eries, tin-can factories, or roadside eateries. They have 
put together different functions of the same general line 
of business — "vertical integration," like an oil well, a 
pipeline, a refinery, and a service station, or an iron 
mine, a blast furnace, a rolling mill, and a steel-product 
warehouse. 

In recent years, it has been mostly vertical integra- 
tion into which business has entered. Grocery-store 
men, such as the A&P people, have begun making corn- 
flakes. Shoe manufacturers have opened shoe-stores. 
Mail-order houses, Montgomery Ward and Sears, Roe- 
buck, for example, have gone into manufacture, on the 
one hand, and store-distribution, on the other. The 
original Standard Oil Company was almost entirely in 
the refining business, but since it was broken up by the 
Supreme Court into nine companies (and over a score of 
smaller ones), the successor companies have expanded 
"vertically" by choice or the pressure of competitors, 

107 



108 INTEGRATION 

back into oil-field production and forward into bulk- 
station distribution, as well as to a small extent into run- 
ning roadside service stations. 

In a sense, industrialists have only been, by means of 
this integration, restoring business to what it used to be. 
The modern shoe-manufacturer who also runs his retail 
stores is like the old-time cobbler who used to make 
shoes in the back of the store and sell them in the front. 
They both are "integrated"; they both make and sell 
shoes. The trend in the late nineteenth century was for 
all the processes of industry to be broken up. Goods 
went through more and more different hands. The 
trend in the twentieth century has been for these processes 
to be put together again, or "re-integrated." 

Times have changed in the last generation, so far as 
the achieving of business unity is concerned. In the gas- 
light and derby-hat days at the turn of the century, the 
men who brought together competitors made the head- 
lines on the financial pages. Those were the days when 
J. Pierpont Morgan put together the United States Steel 
Corporation from a flock of competing steel mills. 
Rockefeller had only recently put together the Standard 
Oil Trust of once-competing oil refiners. The Ameri- 
can Can Company was formed from over 80 little tin- 
can makers. But a budding move to unify a number of 
competing railroads, for the resultant economies, was 
nipped in the bud by the Supreme Court. 1 Those were 
the days of "horizontal integration" and most of the 
business was done by Wall Street bankers. But Wall 
Street, in a growing world, has not grown; horizontal 
integration is nearly, as the French say, "passe." The 
twentieth-century form of American industrial integra- 
tion is largely something in which a business saves up its 
money and buys up other businesses, either as a source 



INTEGRATION 109 

for its raw material, a means for its transportation, or an 
outlet for its products. 

But in recent years, the professors and politicians who 
have attacked "monopoly power," matched prices, ad- 
ministered prices, and price leadership, have also at- 
tacked industrial integration. Perhaps the simplest of 
their criticisms appears to be the plain charge that in- 
dustry ought to be organized by plants, not by industries. 

Thus for instance, an assistant professor of economics 
of Michigan State College, in the most recent assembly 
of witnesses against business as it is now organized, told a 
Congressional Committee that the unit of technological 
efficiency is the plant, not the firm. 2 "This means," he 
said, "that while the advantages of a large-scale integrated 
steel production-unit at Gary or Pittsburgh or Birming- 
ham are evident, there seems no technological justifica- 
tion for the unification of these three functionally 
separate plant units under the administration of one firm. 

"In such cases," he said, "the size of present-day firms 
is explained by conditions of market strategy rather than 
by the economic dictates of the producing process. . . ." 
A more dreaded academic critic of business, almost two 
years earlier, said nearly the same thing. 3 "The unit of 
technological efficiency in modern economic life is the 
factory, not the firm. Most of the huge combinations 
of modern business grew in order to achieve the profits 
of market position, or to provide bankers with new issues 
to float, not to exploit the technological advantages of 
scale. . . ." 

But this is a slow ball compared to the fast curves now 
being pitched against the vertically integrated com- 
panies. It does not take much discernment to see the 
hole in the the aforementioned arguments. They have 
about as much relation to industrial planning as an argu- 



110 INTEGRATION 

ment that in war a brigade, a division, or an army is the 
unit of technological efficiency has to do with military 
planning. It cost the North, in the Civil War, four years 
of war to discover that the unit of technological effi- 
ciency is not the unit of total efficiency; it had at one 
time six armies deployed under independent generals. 

The fast curve now being used in the argument against 
integration is a street-car of an argument called "sub- 
sidy." According to this argument, the profits of a 
more efficient department of an integrated firm are used 
to "subsidize" a less efficient department. Thus the 
books of the big oil companies apparently often show a 
much better profit on transportation than on market- 
ing. 4 The books of A&P show a similarly good-sized 
profit on its manufacturing, but a razor-thin margin of 
final profit on its retail stores. And, say the critics, these 
integrated companies use the profits from their profitable 
departments to outdo competitors in their unprofitable 
departments; they have, in short, too much economic 
power. 

Of course, to charge that one department is "subsidiz- 
ing" another, one must go to the books of the integrated 
company. Those books must contain estimates of the 
prices at which the goods are transferred from one de- 
partment to another. These prices, however, are of 
course imaginary, since the goods stay in the same hands, 
until finally sold to the public. 

Let us look at a simple illustration. 

Many farmers run a partly integrated business. A 
farmer may grow corn, for instance, feed it all to hogs, 
and sell only the hogs. Or he may feed the corn to 
chickens and sell only the eggs. Thus he is in part 
"vertically integrated." 

In such case he might be content merely to figure his 



INTEGRATION 111 

total costs against his total receipts. But he might want 
to go further with his books and learn how much it 
cost him first to grow the corn and second to grow the 
hogs. 

He might then find that his corn cost him only 75 cents 
a bushel to grow but that he was getting the equivalent 
of f 1.50 a bushel of corn, in the selling prices of his hogs. 

To determine whether he was making his profit from 
his corn-growing or his hog-growing, he would have to 
put a "book-value" on the corn as he tossed it to the 
hogs. If he followed general accounting practices, he 
would "carry" his corn on his books at the open market 
which he would get if he sold it instead of feeding it, 
or if he bought it instead of growing it. 

The result may seem at first strange. For if the market 
price of corn were f 1.50, this would mean that the farmer 
was making a large "paper" profit on his corn, but none 
at all on his hogs. On the other hand if it was as low 
as 75 cents, it would mean that he was making no profits 
at all on his corn, but a large profit on his hogs. Thus 
his paper profits might vanish from one side of the busi- 
ness and appear on the other without his changing a single 
thing in his way of farming. 

Obviously this sounds like sheer fiction, but the farmer 
can find it very useful. For it can tell him where to 
concentrate. It might tell him, for instance, that it 
would be cheaper to buy corn than to grow it, or, on 
the other hand, more profitable to sell his corn than to 
feed it. In one case, he might increase his farrowings, 
in the other case, his plantings. 

Of course, this is a vastly oversimplified picture of an 
integrated operation. For the integrated operator, many 
prices are fluctuating at the same time. And for many 
operators, there is no easy outside market price to use 



112 INTEGRATION 

as a yardstick. Yet this is essentially the way they have 
to guess, forecast, and run the business. 

Plainly, however, it would be a rare case indeed in 
which an integrated company could not be accused of 
"subsidizing" one department with the profits of another, 
for all the profits eventually flow into a common pool 
of the company's over-all earnings. Some departments 
are bound to be making more and some less. 

The people who criticize integration almost invariably 
do so because it seems to make it harder for the com- 
petitors of certain departments of the integrated com- 
panies. Let us say, for instance, that in the small town 
of Pleasantville there are two repair garages and an auto- 
mobile dealer. The dealer decides to go into repair 
work also, since he has some spare space and, perhaps, 
equipment. This is a midget form of integration. Then 
if the other two repair garage owners try to prevent or 
discourage him, because he might hurt their business, this 
is a microfilm of the Washington attack on integration. 

For instance Federal Trade Commissioner John Carson 
recently listed these competitive advantages which he 
said the major integrated oil companies enjoyed against 
independent operators: cheaper transport by pipe-line 
and tanker; ready access to supplies, assured by owner- 
ship of crude . . . through crude oil trunklines; assured 
marketing outlets from a highly integrated marketing 
program . . . ; tire, battery and accessory programs 
which provide a profitable source of income without re- 
quiring proportionate investment; and the opportunity to 
diversify risks among the various branches of the industry. 

Many Congressmen sympathize with this view. The 
Chairman of the House Judiciary Committee, during 
"anti-monopoly" hearings in 1950, suggested that the big 
steel-producing companies should be forbidden to go 



INTEGRATION 113 

into the business of fabricating steel. But perhaps the 
most indefatigable opponent of integrated companies in 
Congress is Representative Wright Patman of Texas. In 
1950 he introduced a bill with the extraordinary title, 
"A Bill to promote competition [sic] by forbidding 
manufacturers to engage in retail selling." Under such 
a sweeping prohibition, unless they were especially ex- 
cepted, electric power companies couldn't both generate 
and distribute electricity, bakery companies couldn't also 
run stores, milk companies couldn't run both dairies and 
milk routes, shoe manufacturers couldn't sell direct 
throught their own stores, direct selling, such as "From 
Kalamazoo Direct to You," would be illegal, and even 
the Fuller Brush man would have to find a new employer. 

But Congressmen who want to make vertical com- 
bination illegal may be wasting their time, or may have 
had the way already prepared for them. It seems to be 
already illegal — or dangerously near it — for the Anti- 
trust Division has been for some time arguing that vertical 
combination is "per se" or in itself a violation of the 
Sherman Antitrust Act. And in a series of recent de- 
cisions the Supreme Court has already come within a 
hair's-breadth of agreeing. It looks as though the officers 
of most integrated companies are already walking around 
on borrowed time. A good case could probably be made 
against them already by stringing together certain recent 
statements and remarks of the Supreme Court which are 
of course automatically now a part of the law. 

Thus in the Schine case 5 the high Court said, "The 
concerted action of the parent company, its subsidiaries, 
and the named officers and directors in that endeavor 
was a conspiracy which was not immunized by reason 
of the fact that the members were closely affiliated rathei 
than independent." That would seem to mean that it is 



114 INTEGRATION 

illegal for the officers of different departments of an in- 
tegrated company to cooperate. If they don't coop- 
erate, however, there's no integration. 

In the Paramount case, the Antitrust Division argued 
that vertical integration was in itself illegal under the 
Sherman Act. The Supreme Court would not go that 
far. But it did say that "the legality of vertical integra- 
tion . . . turns on ( 1 ) the purpose or intent with which 
it was conceived, or (2) the power it creates and the at- 
tendant purpose or intent." 

From this, it seems a reasonable probability that the 
Antitrust Division might go into Court and prove a case 
against any integrated company it saw fit to attack, by 
the obvious combination of this case, the Tobacco case 
(power to exclude is a violation), and the Griffith case 
(intent need not always be proved.) It is, in fact, also a 
reasonable possibility that a majority of the present 
Supreme Court might now be willing to agree that verti- 
cal integration is in itself illegal. This is only a surmise. 
But Justice Douglas, in dissenting in the Standard Oil of 
California case, 7 remarked that "a majority of the Court 
could not be obtained [in the Paramount case] for hold- 
ing illegal per se the vertical integration in the motion 
picture industry." 

It was Justice Douglas, himself, who had written the 
majority opinion in the Paramount case. So this sounds 
as though mighty near a majority of the Court was at 
that time willing to do so. Since then two new Justices 
have been appointed, Minton and Clark. Minton wrote 
the A&P Circuit Court decision which roundly de- 
nounced A&P for the "abuses" of integration (hardly 
distinguishable, to economists, from the "uses" of integra- 
tion). Clark stepped directly to the Supreme Court 
bench from the chieftaincy of the Department of Justice. 



INTEGRATION 115 

So neither is likely to see much good in integration. 
But perhaps the Department of Justice scored its great- 
est victory against integration in the A&P case. One 
of its chief charges, accepted by the Circuit Court, was 
that the profits of A&P's manufacturing and wholesaling 
were used to "subsidize" or were "siphoned over to" the 
retailing divisions (and in large part handed on to the 
consumer). It called this an "abuse" of integration, but 
what it successfully criticized seems characteristic of all 
integrated operations. (The A&P case will be discussed 
in a later chapter.) 



15*. Integrated We Stand 



Back in 1907, the United States Commissioner of 
Corporations made a report on the petroleum industry. 
Those were the kerosene days, when nobody had heard 
of octane ratings, of East Texas, of catalytic cracking — 
or even of industrial "integration." But he said, rather 
prophetically, "Each of the stages in the industry can be 
more economically conducted when it works in entire 
harmony with every other stage, and such entire harmony 
can be secured only through a single control.' , 

Because of its nature, the oil business is one of the most 
highly integrated industries in this country. It was not 
so in 1907, when the Commissioner made his remark. 
The early Standard Oil Trust, and the later Standard 
Oil Company, were mostly interested in refining. It was 
only when independents like Texas, Pure Oil, and Sun 
began to give the nine new little children of the big 
company a heavy run for their money that refiners began 
to reach back for supplies into the oil fields, producers 
began to reach forward into refining, and the whole 
industry, in a rough and tumble competition that the 
arrival of the automobile only aggravated, began to sprawl 
and grow, horizontally and vertically. The upshot of 
this competitive free-for-all was, among other things, 
the growth of over 200 refining companies which are 
integrated in varying degrees, of which about 20 are 

116 



INTEGRATED WE STAND 117 

arbitrarily called the "majors" by governmental and other 
critics. 

The basic reason for this integration can be found, 
perhaps, in simple form. There is a standing teen-age 
joke that when you open a peanut-shell, you will "see 
something that nobody has ever seen before nor ever 
will see again." But in the case of most petroleum 
products, nobody ever sees them. When the motorist 
drives down the road, he is using for fuel something that 
throughout its life has been not only "untouched by 
human hands" but also unseen by human eyes. Out of 
the ground, it has flowed, unseen but almost steadily, 
through pipe, coil, cracking plant, bubble-tower, tank- 
car, tank-wagon, and filling station, into the back of his 
car. A huge oil refinery is an almost motionless mass of 
silence. Only through a few little glass openings do the 
engineers ever see the product. Yet it is in almost con- 
stant flow. It is not strange that this flow is so fre- 
quently handled by a single "integrated" management, 
from the oil well to the filling station. 

So it is of interest what the executives of integrated 
oil companies have to say about the structure of their 
companies. A prominent oil company lawyer recently 
said: 

Integration is a great deal more than the mere putting to- 
gether ... of enterprises. ... It is a combination of 
functions for a new purpose. ... [It] is to management 
. . . what assembly line production is to a manufacturing 
plant. . . . Integration facilitates the full, free, easy trans- 
fer of information about the several aspects of the petroleum 
business to one management. . . . 

The integrated firm can more easily engage in effective 
advance planning. ... It is the difference between a group 
of people with organized and understood teamwork rela- 
tionships . . . and a number of separate firms with . . . 



118 INTEGRATED WE STAND 

different plans and objectives . . . different views of their 
relationships to one another and of their objectives and 
responsibilities. . . . The integrated enterprise can plan 
better . . . take a longer view . . . and . . . better coor- 
dinate the carrying out of its program. . . - 1 

And of the oil industry's wartime achievements, the 
same man said, "Experts who handled these operations 
during the war agree that they would have been impossi- 
ble without integrated companies. . . . There would 
have been 500 phone calls instead of five. . . . There 
simply isn't time during war for such inefficiency." 

A former president of the Standard Oil Company 
(N. J.) told the TNEC Committee: 

Integration is the uniting into one business of several of 
the stages through which a material passes. . . . The re- 
finer needs to be assured of his market . . . The marketer 
needs to be assured of his supply. . . . There is a high 
degree of mutual interdependence. ... If such relation- 
ships are not provided by common ownership they must be 
provided by contractual arrangements. When [they] take 
the integrated rather than the contractual form, there is no 
need for secrecy or tactical manoeuvring . . . planning 
can be more effectively accomplished by an integrated com- 
pany . . . the inherent risks of the oil business are substan- 
tial . . . conservative investors . . . want to have some as- 
surance of continuity and stability of earnings. . . . With- 
out integration oil companies would not have been able to 
spend such large sums on research and improvements. 2 

A competitor, president of the Sun Oil Company, said, 

... If producer, transporter, refiner, and marketer are 
all owned and operated independently . . . every unit . . . 
must have its own buying and its own selling organization. 
This is expensive. 

But a greater difficulty is that among these multiplied 
buying and selling agencies there is nobody who has his eye 
on ultimate results — the final cost of the product and the 
price ... to the consumer. Everybody is thinking of 



INTEGRATED WE STAND 119 

how to make the best deal with the man next to him . . . 
nobody is worrying about the consumer down at the end of 
the line. ... In the completely integrated unit ... an ex- 
ecutive authority — president, chairman, executive director, 
board of directors, or what you will — has its eye always on 
that party down at the end of the line: 

. . . After all, the consumer is the boss; . . . somebody 
must keep him in mind all the time; and the hagglers along 
the way can't be expected to do it. They are too much 
engrossed with their own particular jobs; too many removes 
from the consumer. . . . 3 

And another oil-company president has claimed that 
"it is mainly the large integrated company that is doing 
the forward-looking research and development work r 
which requires the assets of an integrated company and 
requires the inter-relation — because many problems in- 
volve . . . manufacture, sale, and transportation." 4 

But oil is only one of many integrated industries. 
Another one, which has incidentally held down its prices 
far below the average over recent decades, is aluminum. 
The president of the Aluminum Company of America 
recently said of his business, "An industry made up of 
small, primary producers could not possibly bring alumi- 
num to the public at a price the average customer could 
afford to pay. An efficient producer of primary alumi- 
num must be well integrated, and it requires a great in- 
vestment of plant and facilities if the operations are 
to be efficient. . . ." 5 

Perhaps the largest recent growth of vertical integra- 
tion has been in dry goods and groceries — through the 
growth of mail order houses and chains. It began, per- 
haps, about twenty years ago. An economist had this 
to say about it. "The unfortunately wide differentiation 
between wholesale and retail prices may be regarded as 
a vestigial remainder of the mercantilist system [as a 



120 INTEGRATED WE STAND 

colossal system of restraint upon trade] which has only 
recently begun to be undermined. The growth of 
mail-order houses and of large-scale retailing through 
chain stores is salutary and . . . abundantly promis- 
ing »• 

The cotton textile industry has been going through the 
throes of integration during and since World War 
II. 

It had been an outstanding exception to the general 
trend. In contrast to petroleum, cotton textiles are 
normally touched, felt, and traded a half dozen times 
from the breaker-room of the spinning mill through the 
weave-shed, the bleachery, the dying and printing plants, 
the wholesaler's warehouse and the retailer's shelves. 

But mills began buying up converters, and converters 
began buying up mills. The first reason the trade gave 
for these economic marriages was the wartime desire of 
government buyers to minimize the number of contracts. 
These government buyers wanted to be able simply to 
buy the finished goods, instead of having to buy the gray 
goods and shepherd them through all the later transac- 
tions. Also, mill owners looked over the fence into the 
converters' business and saw bigger profits, while con- 
verters looked over the fence into the mills' business and 
saw a chance to have a sure supply by buying a mill. So 
Lowenstein bought Merrimac Mills in Alabama; Pacific 
Mills (partly a converter) bought Rhodis Mills. Cluett, 
Peabody bought the Grosvenordale Mills; and so on. 
And all this, incidentally, at a time when mills were selling 
at the highest prices per spindle in 25 years. 

There seem to have been many reasons for the vertical 
integration of American industry. Chiefly, perhaps, 
they could be boiled down to the following: (a) Stability 
of operations; (b) Spreading of the risk; (c) Assurance 



INTEGRATED WE STAND 121 

of either a reliable supply for the marketer or a reliable 
outlet for the producer. 

In "(a)" and "(b)" of these reasons we are back to our 
old friend of the previous chapter — the "subsidizing" of 
one department by another. And here we can go back 
to the simple illustration of the energetic corn-hog farmer. 
He is in two businesses (raising both corn and hogs), 
not, presumably, because he can make money in both. 
In any given year, he probably makes more money in 
one than the other and, if that went on indefinitely, he 
would presumably shift to the one he was best in. But 
he can't tell. And by being in two businesses (and 
closely related ones) , he has a better prospect of staying 
up financially than by being in only one business, just 
as an airplane is safer with two engines than one. 

He is, however, not going to stay in either of these 
businesses if it nets him a loss year after year and seems 
likely to keep on doing so. Neither, by the same token, 
will any integrated company stay persistently in any 
branch of the business that brings it annual trouble, year 
after year. 

As two of the above-mentioned oil presidents told 
the TNEC ten years ago: ". . . If any branch of an in- 
dustry is regularly and persistently unprofitable, the 
average earnings of a fully integrated company will be 
lower than those of companies which engage only in the 
profitable branches. Only if the profitableness of each 
branch varied greatly, frequently, and in opposite di- 
rections from the others would the integrated company 
have an advantage; and that advantage would consist 
solely in its having comparatively stable earnings, not 
higher average earnings over a period of years." 7 

In other words, nobody with an eye to the main chance 
(financially, that is, to steady long-term profits) is going 



122 INTEGRATED WE STAND 

to really "subsidize" one branch of a business out of an- 
other. He may be willing to earn less out of one branch 
than another, over a period of years. Or he may be will- 
ing to risk his money in that branch for a year or several 
years in the hope of a profit that does not materialize. 

But if these are "subsidies," then this is a new meaning 
for the word. It is a meaning which consumers should 
like. It means that somebody is willing to take a com- 
paratively small profit, or a comparatively large risk, 
from which the consumer is bound to be the chief 
beneficiary. 

The attack on integration in itself seems to be another 
attack on "hard competition." It seems to be a defense 
against injury to competitors, rather than injury to com- 
petition. The attackers are generally quite frank about 
this. Up till now, anybody in any part of any business 
has been free to move into any part of that business and 
try his hand at it. The result is bound to be more coin- 
petition. The attack on integration-in-itself could not 
help but slow this down. The consumer would lose. 
The result would be as though the law had been changed 
in the early days to protect the petroleum teamsters who 
tried to tear up the pipelines refiners were laying down. 
The shot would be aimed at the integrating company; 
but the consumer would be the "innocent bystander." 

There is today, however, one more way in which the 
public interest is jeopardized by this attack. It was re- 
lated by the District Court Judge in the latest decision in 
the Alcoa case. Refusing to order the break-up of the 
Aluminum Company, Judge Knox "pointed out that a 
strong aluminum industry was 'a vital necessity for na- 
tional security and the peacetime welfare. . . .' He 
described Alcoa as a company whose service to the public 
had been outstanding in many ways and mentioned the 



INTEGRATED WE STAND 123 

testimony of Army and Navy officials that a disservice 
would be done to national security if the efficiency of the 
aluminum industry were impaired. . . ." 8 



16. The Great Atlantic & 
Pacific Tea Company 1 



As a preliminary to the recent conviction of the A&P 
under the Sherman Act, 18 government investigators 
spent 23 months going over A&P's books, files, records, 
and so on. They examined 2,000,000 documents, going 
back nearly 30 years, and photostated 50,000 of them. 
They submitted 5,000 of these documents in the trial. 
Some very sour remarks were culled from these docu- 
ments and placed in the record. Some minor A&P of- 
ficials had talked out of turn and out of the corner of 
their mouths, on occasions. 

But if any organization, operating at its heyday over 
15,000 stores, and dutifully keeping the records kept by 
modern business, could survive this kind of a combing- 
over without the uncovering of a few indiscreet remarks, 
it is hard to imagine. It would have to be an organization 
with a head only, but no heart. 

The setting of the A&P case goes back to the early 
1930's. Chains were sweeping the cobwebs out of the 
grocery business. But at the same time, the NRA was 
trying to protect high distribution margins. When 
NRA failed, Congress passed the Robinson-Patman Act, 
frankly aimed at the chains, and particularly the grocery 
chains. 

Political foes also pushed bills through various state 

124 



THE CASE OF THE A&P 125 

legislatures to pile punitive taxes on the chains. Con- 
gressman Wright Patman, co-author of the act, in 1940 
introduced into Congress a bill called "H.R. 1" to impose 
a "progressive tax" on chains, progressing withjh eir size. 
On A&P the tax would have been $450,000,000, or about 
50 cents on every dollar the housewife spends at A&P. 
(The big chain normally takes less than a cent and a half 
of her dollar for its net profit.) It would have put 
A&P and all the other chains out of business. The bill 
never got out of committee. 

The A&P lawyers promptly set about devising ways 
for the company to obey the Robinson-Patman Act and 
yet to continue buying cheap and selling cheap. This 
was one of the things on which the Circuit Court first 
criticized them. Said the Court, "After 1936 the [A&P] 
buyers, instead of getting credit for alleged brokerage, 
induced their suppliers to reduce their price further to 
A&P by the amount of the brokerage fee. . . . When 
this was outlawed by a decision of the Third Circuit 
upholding a cease and desist order of the Federal Trade 
Commission. . . . A&P adopted a policy of direct buy- 
ing. It thereafter would buy from no one who sold 
through a broker. . . . This clearly affected the busi- 
ness of brokers, who resisted as best they could. . . ." 

It was shortly after this that the Antitrust Division be- 
gan its attacks on A&P. The story has been told in 
A&P's advertising. The first judge, in Washington, 
D. C, said he hadn't tried a case in 40 years so "abso- 
lutely devoid of evidence." The second judge, in North 
Carolina, said that he had "never tried a case where a 
greater effort, more work, and more investigating had 
been done," but that "you can't make bricks without 
straw and you can't make a case without facts." The 
third judge, in Dallas, threw the case out, because the 



126 THE CASE OF THE A&P 

indictment contained inflammatory statements that he 
wouldn't permit to be presented to a jury. The inde- 
fatigable Antitrust Division then took the case to Dan- 
ville, Illinois. During these years the Supreme Court 
had been re-interpreting the law. A&P was convicted 
in Danville, appealed, was convicted by the Circuit Court 
of Appeals, paid its fine, and did not appeal to the 
Supreme Court. When the Department of Justice, 
thereupon, as expected, started its present civil suit, A&P 
began taking its case to the public. 

People who want to understand the A&P case must 
first learn to skip the abusive and "inflammatory" words 
which the government lawyers persistently used and 
which even the Circuit Court, in some cases, echoed. 
They are semantics — the use of words for ulterior pur- 
poses. They include words like "vicious, illegal prac- 
tices," "abuses," "predatory," "coerce," "blacklist," "boy- 
cott," and so on. They are not as bad as they sound. 
A case does not go through four lower courts and up to 
the United States Circuit Court of Appeals on charges 
as bad as these words would indicate. 

"Blacklist" and "boycott" are good examples of this 
kind of semantics used by the government lawyers. 
They entered the story on what most people would prob- 
ably consider the simplest grounds. The government 
lawyers made a great deal of the case of the over-priced 
corn-flakes. There were only three firms making corn- 
flakes for private brands, a good instance of "monopolistic 
competition" if corn-flakes are to be considered a separate 
industry. A&P was buying from one of them. The 
maker's profits on these sales to A&P were very large. 
So A&P buyers, asking for a lower price, pointed out 
that A&P itself is a very successful manufacturer, and 
could make its own corn-flakes. Down came the price, 



THE CASE OF THE A&P 127 

not only to A&P, but to others also. The threat was that 
A&P might, if it went into corn-flakes itself, scratch this 
manufacturer from its buying list and do no more busi- 
ness with it. This, however, to the government lawyers 
and the Court was "coercion," "blacklisting," and "boy- 



cott." 



Up to this time a boycott had been an agreement be- 
tween different people not to deal with somebody. A 
Captain Boycott, in Ireland in 1880, was the first victim 
of such. As the Circuit Court said, a boycott had been 
found illegal under the Sherman Act in the Fashion 
Originators Guild case. 2 But it is a big jump from this 
case to the A&P case. In the former one, a group of 
originators of fashions tried to drive out of business some 
manufacturers who kept copying their originals and 
selling the copies cheap. 

In the A&P case, however, the Court found A&P 
guilty of boycotting by citing the Schine case 3 already 
mentioned in a previous chapter, in which the Supreme 
Court found that the cooperation of the officers of an 
integrated company might be a conspiracy. And after 
all, the A&P is really an organization of men. 

This seems to mean that any integrated company which 
refuses to do business with some other firm, because the 
other firm will not cut prices, may be violating the 
Sherman Antitrust Act in doing so. This, however, is 
not what most people would assume from the word 
"boycott." 

Nor would most people consider A&P's forcing down 
of the price of corn-flakes by threatening to make them 
itself, as "coercion." According to that definition, a 
householder who told a carpenter "Your price is too 
high, I'll do the job myself," is coercing the carpenter. 

Out of the millions of words in the case (and with the 



128 THE CASE OF THE A&P 

vicious words left out;, the government lawyers' criti- 
cisms divide themselves into three major groups. They 
attacked A&P on its methods of buying, on its methods of 
selling, and on its integration of buying, selling, and 
manufacturing. Each group of criticisms involves a 
radical new interpretation of the law and economics — 
and a most questionable one. 

The government lawyers attacked A&P's buying meth- 
ods chiefly on the following grounds. A&P buys 
cheaper — or tries to — from manufacturers, processors, 
and canners than its competitors. It does so by volume 
purchases, for which the law permits lower prices. But 
therefore, argued the government lawyers, these suppliers 
must increase their prices to their other customers, to 
make up for the smaller profits, or the losses, they take on 
their A&P business. Therefore, by knocking down 
prices for what it buys, A&P actually drives them up for 
other people and for most of the public. 

Government lawyers have made this economically ab- 
surd statement again and again. It has become almost 
their theme-song and party-line on the case, since A&P 
has taken the issue to the consumer. Thus Attorney- 
General Howard McGrath has said that Justice Depart- 
ment success in the A&P case "should result in lower 
food prices for over 90 per cent of the public which 
buys from other grocers who because of A&P's practices 
are required to purchase their supplies at higher 
prices. . . ." 4 

Assistant Attorney-General Herbert A. Bergson said 
". . . when these same suppliers sell to other stores or 
chains, they are obliged to add to their prices the losses 
they have sustained through doing business with A&P." 5 
The Circuit Court of Appeals, in affirming A&P's con- 
viction, used it three times. It said, ". . . the supplier 



THE CASE OF THE A&P 129 

had to make his profit out of his other customers at 
higher prices which were passed on to the competition 
A&P met in the retail field . . . the price was added to 
A&P's competitors' costs . . . increased the price to 
A&P's competitors. . . ." 

Businessmen do not usually price this way at all, al- 
though they might like to. When, in an "imperfect 
market" like that of food products, somebody gets a cut, 
the likely result is that his competitors will hear about it 
somehow and go after it also. The effect is not to raise 
prices, generally, but to lower them. It is a most unreal 
assumption that a canner or a corn-flakes maker, after 
tangling with an A&P buyer and conceding a price cut, 
will be able to turn around and raise his prices to his 
other customers. If he were able to do so, why didn't 
he do it before? It is also a most unreal assumption 
that this canner or corn-flakes maker will have knuckled 
under to the A&P buyer to the point of taking an A&P 
order which nets him an actual loss. 

The idea that "over 90 per cent" of the public would 
get lower prices if A&P didn't get lower prices, is like 
the idea of the tail wagging the dog. It is out of this 
world. As an economist has said, "In imperfect markets 
such as those in which A&P buys, an integral part of the 
process of price reduction is unsystematic, buyer-en- 
forced price discrimination." 6 And "Actually, buyer- 
instigated price discrimination exerts downward pressure 
on general price levels. A price reduction to one buyer 
has what (for the seller) is a most unfortunate tendency 
to spread." 7 

The government lawyers' theory ignored another im- 
portant point. When a food manufacturer has a large, 
continuous market with a steady, prompt-paying cus- 
tomer, this actually can make it easier for him to lower 



130 THE CASE OF THE A&P 

his price to other customers. His sales to such a cus- 
tomer involve practically no selling cost, involve no credit 
risk or loss, carry a large part of the overhead of his 
business, and spare him the need of reaching for a quick 
profit on each sale to offset the risk of not soon making 
another sale. 

The Court, nevertheless, concluded that "this two- 
price level . . . could not help but restrain trade and tend 
toward monopoly." Yet the government lawyers hadn't 
proved this curiously naive theory. They merely as- 
sumed it, or deduced it and the Court accepted the deduc- 
tion. The Court's decision also criticized A&P's buying 
methods for their effect on the food broker. (See page 
125 for a part of its words.) This criticism has a curi- 
ous economic implication, as follows. 

A&P's buyers, in their efforts to reduce costs, were 
trying to save the cost of the brokerage. In effect A&P 
did its own brokerage. This by-passed a lot of brokers. 
But the Court's condemnation was only the latest in a 
series of moves in which first Congress, then the Federal 
Trade Commission, and then the Department of Justice 
were, in effect, trying to make A&P pay brokerage 
anyway. 

That worked as follows: 

To begin with, when A&P bought from, let us say, a 
canner, it had to pay the price plus the brokerage. Then 
it began to demand that it be excused from the brokerage. 
This was outlawed by the Robinson-Patman Act, Sec- 
tion 2(c). A&P began, then, to demand that it get a 
lower price by the amount of the brokerage, which was 
really just a different method of billing. This was 
stopped by the Federal Trade Commission. 

Then A&P announced to the trade that it would buy 
solely from firms that dealt only direct and not at all 



THE CASE OF THE A&P 131 

through brokers. (In such case, there could be no charge 
against A&P of evading the brokerage.) Since this now 
seems legally questionable, the next natural step for 
A&P would seem to be to buy or build its own can- 
neries, thus vertically integrating still further. But this 
would seem to be legally and economically questionable, 
since the Antitrust Division has brought a suit to break 
up the existing A&P, both vertically and horizontally. 

The government lawyers would seem to favor only 
one way by which A&P could solve its difficulty. It 
could pay the brokerage, even where it does not go 
through brokers. This would be a "phantom broker- 
age," charged by the canner and collected from A&P, 
even though there was no broker. It would be akin to 
the "phantom freight" sometimes collected by firms sell- 
ing on geographical basing points. Phantom freight, 
however, has been condemned by the Supreme Court in 
the Corn Products 8 and Staley 9 cases. And it would 
violate the spirit of the Federal Trade Commission's 
"mill-net" definition of price, under which a seller must 
net the same from different customers, or else a "price- 
discrimination" results. The seller, in this case, would 
net more from A&P by the amount of the phantom 
brokerage. The "discrimination" would be against 
A&P. This "discrimination" would be an actual, as well 
as a legal, one as long as A&P continued to perform its 
own brokerage functions, while also having to pay phan- 
tom brokerage. 

The food business is a huge and sprawling one, doing 
tens of billions of dollars of sales a year, in products and 
brands as varied as the goods on a super-market's shelves. 
A&P people say it includes 50,000 food manufacturers, 
45,000 wholesalers and about 500,000 retail food mer- 
chants including nearly 1,600 chain store companies with 



132 THE CASE OF THE A&P 

50,000 outlets. It is anything but a "perfect market." 
Prices are what sellers can get, and they vary between 
places, between sellers, and between buyers. 

This is the reason for brokers, but it is also the reason 
for large chains' buying success. Any large, close-knit 
buying department that can be "all over the map" in 
such an "imperfect market" can find for itself the best 
prices, and pass them on to the consumer. This, of 
course, is hard on sellers, who don't like to have this large 
buying power squeeze down their profit margins. In 
effect, such large, skilled buying organizations as A&P's 
are the actual day-to-day forces, which police such a 
market against the development of temporary "oligopo- 
lies" and keep profit margins of producers down. 

But the government lawyers were only getting steam 
up when they criticised A&P's buying policies. As will 
be discussed in the next chapter, they also criticized its 
policies of cutting profit margins to get more customers, 
of helping out its store operations with profits from manu- 
facturing, and of cutting prices in one division to get 
business and making this up in other divisions. 

One theme runs consistently through all these charges. 
Each and all are against price reductions, whether in 
prices paid or in prices charged. Each remedy asked by 
the Antitrust Division would result in A&P's either pay- 
ing or charging higher prices, or both. 

Only by hypothesis did the government lawyers look 
toward the consumer's interest in lower prices. The 
A&P policies they attack result from day to day in actual 
lower prices. The lower prices for the consumer which 
they favor are conjectural, imaginary, deductive, some 
other day. This pie-in-the-sky is promised on the 
grounds that (1) if A&P didn't buy things so cheaply 
other grocers could; and (2) if A&P were stopped from 



THE CASE OF THE A&P 133 

cutting prices in some districts, it wouldn't raise them 
so high in others. Actually, the entire sound-track, 
except for these falsettos, is concerned with A&P's com- 
petitors, not its customers. 



17. A Strange New 

Definition of "Monopolize" 



In the year ended February 28, 1950, the A&P, with all 
its corporate children, sold about $2,900,000,000 worth of 
groceries and earned, on this, a "consolidated net profit" 
of about $33,400,000, or about IYq cents on each dollar 
of sales. These figures on sales mean only sales to the 
public. They do not mean what might be called A&P's 
imaginary "sales to itself," that is, from one division to 
another. 

The profits, also, are for "the whole business," The 
accountants got them by taking the whole $2,900,000,000 
rung up in the cash register and subtracting from it all 
the costs: buying, manufacturing, retailing, administra- 
tion, taxes, and so forth, which came to about 98% cents 
on each dollar of sales. For "accounting control" pur- 
poses, however, A&P broke down its profits into those 
of different departments. It is a vertically integrated 
firm and it wanted to know how it was doing at different 
levels. 

The accountants used, as near as possible, the usual 
accounting method, as sketched in Chapter 14 on Integra- 
tion. They priced the goods transferred from one de- 
partment to another at as near as possible the going 
"market." This is not too easy in the food business, 

134 



A NEW DEFINITION OF "MONOPOLIZE" 135 

since food is handled in a very 'imperfect' market. The 
results indicated, as they have been doing for years, that 
A&P makes rather lush profits in its manufacturing, but 
almost paper-thin profits in its retailing department. 

By and large these figures would say that A&P ought to 
do more manufacturing, where it seems to make the most 
money, and less retailing. This is not so certain though. 
One of the things that helps manufacturers most to lower 
costs is steady, uninterrupted operation for an assured 
mass market. And this the A&P manufacturing divisions 
have, because A&P is a mass retailer. They might not 
find it if A&P were broken up, unless they tied up with 
some other mass distributor, in another integration. 
They also save by not having to have sales departments. 

Nobody knows how far A&P's big manufacturing 
profits are due to this tie-up with its retailing. But it 
looks as though A&P might almost go so far as to take 
a book-loss on its retailing in order to give its manufac- 
turing divisions this steady mass outlet. Few people, 
however, used to worry about this. It was a nice ac- 
countant's problem for a long winter evening. The im- 
portant thing was that the big-volume total operation 
made a profit as a whole. 

When the Antitrust Division people saw these figures 
on division profits, however, they expressed what some 
people might call horror and others, elation. They said 
in the closing argument at the Danville trial: 

The very heart of the government's complaint is, in effect, 
that the company uses the profits from what the, government 
calls its non-retail operations to lower its retail prices. And 
the government contends by such practices, the A&P made 
it difficult if not impossible for others to compete. Without 
these advantages which permit A&P to reduce gross profit, 
no competitor can hope to remain long in business. . . . 

Profits from all operations of the system are siphoned 



136 A NEW DEFINITION OF "MONOPOLIZE" 

into its retail stores in order to offset uneconomic retail 
profit rates. ... By 1942 the crediting of non-retail profits 
to retail operations enabled A&P to operate its stores with 
inconsequential profits on retail sales. . . . The profits 
from the non-retail end . . . subsidized the retail business, 
so that the latter could operate at an uneconomic profit 
rate, a privilege not possible to A&P's competitors. This, 
the government contends, is an inherent abuse of the vertical 
integration of A&P's system. 1 [Italics added.] 

This is perhaps the most astounding charge ever 
brought against any company under the Sherman Anti- 
trust Act in its entire 60 years. One might expect A&P 
to be attacked for having gouged the housewife with 
its high manufacturing profits, then to be forgiven for 
having disgorged and passed them on to her through its 
retail divisions. Instead it is attacked, not for making 
so much money on manufacture but for making so little 
on retailing. The phrases "uneconomic profit rate" 
and "inconsequential profits," in their context, indicate 
that, in the government lawyers' opinions, A&P did not 
charge enough for its groceries. By old-fashioned stand- 
ards, the government is attacking A&P for its virtues. 

Moreover, when the government lawyers call this type 
of operation "an inherent abuse of the vertical integra- 
tion of A&P," they have forged a two-edged sword, 
which can, as successfully, cut down any other integrated 
operation, as easily as that of the big chain. "Inherent" 
it is, not only in A&P's operation, but in any other in 
which some divisions or departments make larger profits 
than others. But if it is an "abuse," then virtually any 
integrated operation can be found to be an illegal abuse. 

Another bombshell for American business methods was 
exploded by the government lawyers in their attack on 
the lowering of prices to get more volume. The classic 
instance of this was the action of the Ford Motor Com- 



A NEW DEFINITION OF "MONOPOLIZE" 137 

pany around 1910, when it determined to build a car 
"which the American workman could afford. " .It cut 
its prices sharply, then hoped this would bring in a volume 
of orders heavy enough to get production costs down to 
a profitable level. 

This has been characteristic of American industry in 
the last generation or more. Twentieth-century indus- 
trialists are looking for a profit just as were the earlier 
capitalists. But they go at it in a more roundabout way, 
via low prices and mass production. The idea is some- 
what as follows: 

If you charge $10,000 for an automobile you may sell 
only a hundred of them. You may make them at a 
cost of only $5,000, but this will give you a profit of 
only $500,000. But if you charge only $1,000 apiece, 
you may get orders for a million cars, which you may 
be able to make at $900 apiece, due to the savings on 
mass production. Then your profit is $100,000,000. 

There is, however, a speculation involved here, for 
there is no real way, except trial and error, to determine, 
when you cut prices, how much of a cut will bring how 
much of an increase in volume, which will permit how 
much of a decrease in costs. And the price of an error 
is a loss. 

In the grocery business, this process consists of cutting 
the markup on goods, or the "gross profit rate," in the 
hope of getting more customers, hence lower store costs, 
hence more net profits. This is what the government 
lawyers had to say about it in the A&P case. 

In speaking about how meat business . . . had increased 
from $200 to $1,200 per store, he [John Hartford, chief 
defendant] pointed out: "This was accomplished bv re- 
ducing the gross profit rate until the volume was built up 
to a point where the expense rate was low enough to permit 



138 A NEW DEFINITION OF "MONOPOLIZE" 

the store to operate at a profit." We know of no more 
clear and concise words with which to express the govern- 
ment's charge. . . . [Italics added.] 

. . . The evil . . . inherent in this pattern lies in the 
selection of an arbitrary gross profit rate chosen without 
regard to the expense rate and fixed at a figure which de- 
fendants believe will produce the chosen figure of desired 
volume. 2 

Of course, the lowering of gross profit rates may 
ultimately result in increased sales and hence in increased 
profits. But [this] ignores the restraining effect upon 
A&P's retail competition during the interval required for 
increased sales to reduce the expense rate. 3 

At another point the government brief remarks that 
an "honest retailer" would try to "price his merchandise 
in the traditional American way, that is, cost, plus ex- 
penses, plus a profit." 

It has been said of John Hartford, one of the A&P 
founders, that "he would rather sell 200 pounds of butter 
at one cent per pound profit than 100 pounds at two cents 
a pound profit." The A&P's policy, here condemned, 
is akin to what the late Wendell Willkie, when he was 
a power-company president, used to call an "objective 
rate." The TV A claimed to have pioneered it and there 
was quite an amusing controversy, with Willkie retorting 
"Don't teach grandmother to spin." It consisted in 
lowering rates to get more customers in order to decrease 
unit-costs, which increased profits. 

How the automobile industry still follows this policy 
may be seen from the following remarks of President 
Charles E. Wilson of General Motors. 

Question: In making your prices, is there such a thing as 
a stabilized profit? 

Answer: It can't be stabilized because it keeps changing 
all the time. ... A fair price, I've always thought, is a 
compromise between what has been paid for similar articles, 



A NEW DEFINITION OF "MONOPOLIZE" 139 

what your competitors are willing to sell comparable prod- 
ucts for, and what your costs are. It's when you compro- 
mise on those things that you finally decide on your price. 
If it's too high, you wonder how you can get the cost down 
so you can cut the price. Or, if you lose the business, you 
go ahead and take an abnormally low profit or even go into 
the red awhile until you gain enough time to reorganize 
your designs and your production processes to try to make 
a profit. 4 ' [Italics added.] 

The Antitrust lawyers had one more basic criticism 
of A&P's operations along the same lines. It followed 
the same reasoning as the previously mentioned assump- 
tion that suppliers, who sold to A&P at a lower price, 
made it up by charging other people a higher price. So 
the government lawyers claimed that, when A&P sold 
lower in some areas to get business, it then made it up in 
other areas with higher prices. 

Thus, they claimed, in the civil case filed after the 
criminal case, that "As was found in the criminal case, 
A&P expanded its retail sales, and eliminated competition 
from independent grocers, meat dealers and local food 
chains by temporarily selling food at a loss in selected 
retail areas in order to expand its sales outlets in such 
areas, and recouping these losses by charging consumers 
higher prices in less competitive areas." 

Here again the reductions were facts, while the ad- 
vances to "recoup" them were assumed. The Circuit 
Court, discussing A&P's sales in "Area X" and "Area Y," 
said, "When the gross profit rate is reduced in Area X, 
it is an almost irresistible conclusion that A&P had the 
power to compensate ... by raising the gross profit rate 
and retail prices in Area Y. . . . There ifiust inevitably 
be a compensation somewhere in the system for a loss 
somewhere else, as the over-all policy of the company 
is to earn $7 a share per annum on its stock." [Italics 



140 A NEW DEFINITION OF "MONOPOLIZE" 

added.] Here again, the increases are assumed and the 
assumption is merely that A&P made money in some 
places, while it lost it in others, and the gains enabled it 
to keep afloat financially. This is essentially the argu- 
ment against vertical integration, turned horizontally. 
This has never been a violation of the law before. It is 
the normal course of business. If this argument were 
carried to its logical conclusion, A&P could be condemned 
for recouping from the buyers of cabbages for its losses 
on turnips, or from buyers on Saturday for its losses on 
Wednesday. 

It is hard to guess where these hypothetical markets 
might be where A&P can arbitrarily raise its prices to 
make up for losses incurred elsewhere. It does very little 
business at rural crossroads. There is vigorous price 
competition everywhere it operates. 

Probably the best way to describe A&P's retail price 
policy would be to say that it tries to keep its gross profit 
rate at the lowest practical point — lower than competi- 
tion, if possible — everywhere. That makes it especially 
low in some areas, either because of stiffer competition, 
or in order to build necessary volume. 

The Circuit Court, in its decision, said, "we will con- 
sider this case as a whole." And that is the way it should 
be considered. The whole case, from government briefs 
to court decision, reeks with criticisms of price cuts. 
It is immensely concerned with the actual or potential 
fate of A&P's competitors, but gives only the merest 
lip service to its customers. The steady refrain, like a 
steady rain, of the government lawyers' criticism and the 
court's findings against A&P was that it cut, cut, and 
then cut prices. 

In many of the cases previously discussed in this book, 
one could draw a fine point of distinction on the follow- 



A NEW DEFINITION OF "MONOPOLIZE" 141 

ing question: did the defendant company intend, want, 
or hope to get ahead by killing off competitors, or was 
it merely driving ahead to expand its own business, while 
disregarding the fate of competitors? In the A&P case 
the question is pointless. The A&P management must be 
assumed to have economic sense. And in the food busi- 
ness, to try to kill off all competition or competitors is 
like trying to sweep back the ocean. 

Or as two economists have put it more specifically: 
"Even granting the possibility of eliminating rivals by 
means of local price-cutting, the retail field is so easy to 
enter that, when this purging process had been raised, 
new rivals very likely would enter the field again almost 
immediately, with the result that all the effort would 
have gone for naught. This . . . situation is particu- 
larly true in the grocery field, since normally stocks of 
merchandise and facilities are easily obtained. . . ." 5 

In this connection the Circuit Court made the incredi- 
ble statement that "the inevitable [sic] consequence of 
this whole business pattern [of A&P] is to create a chain 
reaction of ever-increasing selling volume and ever- 
increasing requirements and hence purchasing power for 
A&P, and for its competitors hardships not produced by 
competitive forces and, conceivably, ultimate extinction." 

Yet at the beginning of the period reviewed in the 
case, A&P did only about 11 per cent of the country's 
retail food business and at the end only about 7 l / 2 per 
cent. In recent years, other national corporate chains 
have been gaining on A&P; "voluntary" chains like Red 
& White have been gaining on the corporate chains; local 
chains have been gaining on national chains; and inde- 
pendents have been gaining on all chains. The "ulti- 
mate extinction" of A&P's competitors seems a long way 
off. 



142 A NEW DEFINITION OF "MONOPOLIZE" 

Two of A&P's biggest chain competitors, Kroger and 
Safeway, were indicted a few years ago on almost the 
identical Sherman Act charges of monopoly and re- 
straint of trade. They did not fight the charge and so 
pleaded "nolo contendere" [which is Latin for "I do 
not choose to fight"] . They paid their fines and got off. 
But it does not make much sense that three competitors 
could each be charged with having a "monopoly," espe- 
cially in the food business. 

The reason so many of A&P's competitors have come 
to its defense in the public prints seems to be a rather 
simple one. They are not concerned over the particular 
fate of A&P in the Antitrust Division's pending suit for 
A&P's dissolution. Nor would the public need to be 
concerned about it, if the suit were merely brought to 
"get" A&P for some political sin or error. But A&P's 
competitors are concerned because of the business 
methods that have been outlawed, directly or indirectly, 
in the recent suit. The housewife should be even more 
concerned, for if A&P is broken up for using these 
methods, other firms will have to stop using them and 
her ten-dollar bill at the grocery store will return her a 
good deal less change, or a good deal less groceries, or 
both. 



18. The Attack on Bigness 

in Business 



President Truman recently said, "I would rather see a 
hundred steel companies than one United States Steel 
Corporation, and I would rather see a thousand banks 
than one National City Bank. 

"I would much rather see a thousand insurance com- 
panies with four million dollar assets each than one in- 
surance company with four billion" x 

And the remarks of Supreme Court Justice William O. 
Douglas on the subject, though already quoted, are perti- 
nent here also. He said: 

"We have here the problem of bigness. Its lesson 
should by now have been burned into our memory by 
Brandeis. The 'Curse of Bigness' shows how size can 
become a menace — both industrial and social. . . ." 2 
One must note a sharp distinction between this attack 
on bigness and the attack, outlined in Chapter 10, on the 
"Big Three's and Four's" of American industry. They 
are quite different. The other was an attack on what 
might be called "comparative bigness in particular indus- 
tries," which might apply to companies in small or nar- 
rowly defined industries. This chapter is about the at- 
tack on what might be called "absolute bigness." The 
other might be aimed at a merely million-dolhr firm 

143 



144 ATTACK ON BIGNESS IN BUSINESS 

which happened to be the largest part of the can-opener 
or pretzel-bending industry; in this chapter, however, the 
hunters are looking strictly for big game in the billion- 
dollar category. 

Thus, while the people who have this fear of sheer 
bigness often use the word "monopoly," the word is 
probably less well taken here than in the former case. 
As Charles E. Wilson whose General Electric Company 
is, of course, here under attack, recently put it, people 
often overlook "the fact that in many product lines small 
businesses come considerably closer to having a monopoly 
than do the larger ones. Especially is this true of those 
concerns which have been built around closely held 
patent positions. ... in our consideration of the prob- 
lem of bigness in business we must recognize that it is 
a problem totally distinct and separate from that of illegal 
monopolization. Only by such a differentiation will we 
be able to achieve the dispassionate attitude essential to 
an intelligent approach to the problem. . . ." 3 

Some critics complain that this fear of absolute bigness 
in business is not very discriminating or analytical. 
There are two different kinds of business bigness — in 
assets or in sales. It takes up to 30 times as large assets 
in some industries as in others to do the same annual 
volume of business. To do a billion dollars of annual 
sales, a grocery chain may need an investment of only 
100 million dollars, but a power company may need five 
billions. Which is the measure of size? 

At this point, however, this is no matter. The attack 
is due to a fear; fear is an emotion; and in emotional 
matters, figures do not matter too much. Nor does 
analysis. The fear is of the country's biggest companies. 
Statisticians who try to define a company in such cate- 
gory will succeed no better than the Irishman who tried 



ATTACK ON BIGNESS IN BUSINESS 145 

to tie a string around a puff of smoke. The nearest to 
such a definition might be: "Any company of whom an 
observer might say, "Is it biiig? Is it big! Is it big! " 

Suffice it to say that this would include the blue-ribbon 
list of nationally known firms such as General Motors, 
Standard Oil Company (N. J.), United States Steel, 
A&P, National City Bank, A^etropolitan Life Insurance 
Company, General Electric, American Telephone & 
Telegraph, and so on. Membership in this "club" comes 
high; to get on the list brings respect from some quarters, 
distrust from others. 

The big business corporation of today seems to have 
inherited, in modern folklore, the horns and tail once 
pinned on the small owner-capitalist of the ninteenth 
century. The modern political cartoonist, particularly 
of the left wing, usually means "a big corporation" when 
he draws a fat man in a cutaway and top-hat. Half 
a century ago this usually meant Wall Street; a century 
ago its earlier counterpart meant a private capitalist. 

Congressional committee hearings were held through- 
out most of 1949 on the subject of "monopoly power" 
and concerned themselves largely with big companies 
like Metropolitan Life Insurance, du Pont, and United 
States Steel. These hearings produced no legislation, 
and in fact were not expected to. The Chairman of the 
House Judiciary Committee, who conducted them, Rep- 
resentative Emanuel Celler, introduced and publicized a 
bill, however, which said: 

Any corporation whose size and power are such as sub- 
stantially to lessen competition or to create a monopoly in 
any line of commerce in any section of the country shall 
be dissolved into a number of independent enterprises suffi- 
cient to restore competition in such line of commerce; pro- 
vided that no action under this section shall be taken if the 



146 ATTACK ON BIGNESS IN BUSINESS 

corporation . . . can demonstrate that the proposed action 
would materially lessen efficiency in any line of commerce. 

If Congress passed any such bill, its effect would, of 
course, depend entirely on how the Supreme Court in- 
terpreted it. The Court has already gone about as far 
as this bill would seem to go. But the bill would make 
the Court's path easier, or its progress faster, in at least 
three ways. 

First, it adds five important words to the present 
law and changes two. The predicate of the first sentence 
is taken from the Clayton Act which says "where the 
effect may be substantially to lessen competition, etc., 
in any line of commerce." But this bill strikes out the 
important "may be," at the beginning, and, at the end, 
adds "in any section of the country." The present 
Supreme Court could do lots of things with those changes. 

More important, such an Act of Congress would end 
the Court's troubles, once and for all, over how to get 
/"round its earlier finding, in 1920, that "mere size is not 
J an offense against the Sherman Act." 

And lastly, it would vastly simplify the present com- 
plicated legal procedure through which the Antitrust 
Division must go to get a corporation broken up (as in 
the A&P case, in which it had first to win a criminal 
suit, then bring a civil suit). 

While Congress seems unlikely to pass any such legis- 
lation in the near future, it has shown some sympathy. 
Thus, in the law for the disposal of war plants, it placed 
handicaps on their sale to larger corporations. President 
Truman, in his proposed bill in January, 1950, for the 
sale of government synthetic rubber plants, proposed 
somewhat similar handicaps on their sale to the bigger 
companies who might bid, even to those who had de- 
signed, had built, and had been running them. 



ATTACK ON BIGNESS IN BUSINESS 147 

There seem to be two major fears of sheer bigness 
in business. One is, of course, the concern lest it crush 
little business. The other is a broader fear that it will 
produce serious social and economic changes. 



19. The Job of Big Business 



If we had no big business, we would have to invent it. 
And if we are not willing to have privately operated 
big business, we shall have to have big business operated 
by the government. When the President said he would 
rather see one hundred small steel companies than one 
United States Steel Corporation, he was merely being 
nostalgic for the "good old days." But the President 
himself heads the biggest business in the world, the United 
States Government. 

Included in this government is the biggest insurance 
system in the world, the Social Security Administration; 
the second biggest bank in the world, the Reconstruction 
Finance Corporation; the biggest owner and operator 
of ships in the world, the Maritime Commission; and 
the biggest butter-and-egg dealer in the world, the Com- 
modity Credit Corporation. 

In these days of big cities, big unions, big armies, 
and big government departments, there is sometimes a 
question whether some businesses are big enough. Both 
government people and corporate executives sometimes 
show this feeling. Government people have since the 
war urged that the government be put into new pro- 
grams of electric power and of synthetic fuel develop- 
ment because, they said, these programs were too big 
for private business to handle. 

148 



THE JOB OF BIG BUSINESS 149 

On the other side of the fence, an instance occurred 
since the war in which a job was too big for two big 
private companies to swing by themselves and they 
called in two even bigger companies. The Texas Com- 
pany and the Standard Oil Company of California, 
trying to swing the Arabian-American Oil Company, 
took in the Standard Oil Company (N. J.) and the 
Socony- Vacuum Oil Company. These are four of the 
biggest companies in the third biggest industry in 
America. 

The technological advantages of size were perhaps 
first shown in railroading. The present New York 
Central line to Buffalo was once in the hands of eleven 
different companies and out of where is now the North 
Station of the Boston & Maine Railroad once ran lines 
owned by the Boston and Eastern, the Boston and 
Lowell, the Boston and Fitchburg, and others. 

The scale of economical size has risen vastly since then 
and continues to rise. Modern chemical developments 
take initial outlays in the tens of millions. When du 
Pont went looking for a competitor to go into cello- 
phane it had to find somebody who could put up $20,- 
000,000. Du Pont put $43,000,000 into dyestuffs be- 
fore profits offset losses and spent $27,000,000 on nylon 
before it knew whether it had "won or lost." Pratt & 
Whitney spent $40,000,000 on the development of a 
single engine and the armed forces spent over $50,000,- 
000 on the B-54 and then abandoned it. Over twenty 
years ago, the Ford Motor Company spent $100,000,000 
to switch from the Model T to the Model A, but, in 
1948, General Motors had to spend $50,000,000 merely 
to bring out its newly engineered Chevrolet. 

Oil wells used to cost between $50 to $100,000, but, 
with deep drilling, they went to $250,000 and, with off- 



150 THE JOB OF BIG BUSINESS 

shore drilling in the Gulf of Mexico, the Humble Oil 
Company recently sank $2,000,000 in a single deep- 
water well. 

The political talk is all of hydro-electric power rather 
than steam power, but hydro costs about twice as much 
as steam per kilowatt for original investment. Similarly, 
the latest developments in liquid fuel call for multiplying 
original costs; gasoline from natural gas means twice the 
original plant outlay as from petroleum; from coal, four 
times as much. And in the steel industry, greatly in- 
creased outlays will be needed in the beneficiation of 
taconite compared with those for the mining of Mesabi 
ore. 

Whether his humor was intentional or not, the case 
has been put neatly by the president of the du Pont 
Company. Testifying in Washington on bigness and 
the antitrust laws, he said, "I think it is false reasoning 
to deplore the fact that a small company cannot gather 
unto itself the capital necessary to produce a nylon or a 
cellophane. If it could it would no longer be a small 
company." * 

Of course, the reason for the large size of these modern 
investments is that once the plant is built, the high initial 
cost is followed by a low production cost. In the last 
analysis, these big operations are economical. Thus when 
the President expressed a yearning for a decimation of 
industrial corporate size he was in effect like the man 
who went into the store and said "No I don't want the 
'large economy size'; give me the small spendthrift size." 

But the really big companies are not so much justified 
by the large cost of these things, as by the large risks. 
The very large corporation is one means by which men 
can avoid the great risks of a fast-moving and growing 
economy. These risks include obsolescence of products 



THE JOB OF BIG BUSINESS 151 

and services, fickle markets, changing fashions and un- 
predictable social trends. 

The large corporation protects itself against these 
risks not by avoiding them but, like an insurance com- 
pany, by spreading or diversifying them. It operates 
in different parts of the country, produces for different 
kinds of buyers, and keeps bringing new products on 
the market. This enables it to stay in business in a 
dynamic world, which is in a constant state of flux. But 
this diversification takes size. 

The greatest risk against which industrialists have 
learned to protect their companies is obsolescence, the 
inevitable fading of earning power out of machinery 
and of marketability out of products due to competitors' 
innovations in a free economy. Obsolescence has much 
to do with the growth of bigness in American business. 
A classic case was that of the Ford Motor Company, 
which made no important changes in its Model T from 
1918 to 1928. This nearly cost the Ford Motor Com- 
pany its corporate life, but it was lucky enough or 
foresighted enough to be able to dig up the $100,000,000 
necessary to get back in the game. 

President Charles E. Wilson of General Motors was 
recently asked what were the advantages of GM's group 
ownership of different production units. He said, "One 
advantage of the grouping of these operating divisions is 
that they don't succumb as the result of one bad mistake, 
which sometimes happens in different companies. 

"Some people might build up a company and have 
a pretty nice business and a good reputation and then 
make one big mistake, and before it was discovered they 
would be out of business. . . ." 2 

It was big American business, in fact, which developed 
the very concept of obsolescence. It is not mentioned 



152 THE JOB OF BIG BUSINESS 

by any of the classical economists, from Adam Smith 
to Jevons, and they evidently didn't know anything 
about it. They took it for granted that if you put money 
in brick and stone it would keep on earning money, 
almost as though you put it in government bonds. They 
called this "fixed capital," or sometimes "sunk capital." 
The capitalists, however, who made this mistake, usually 
found themselves in a fix and, if they didn't keep putting 
more money into better property, they eventually were 
also sunk. 

Nor did the two American writers who have had the 
most to do with fashioning present-day economic theory, 
Wesley Mitchell and Thorstein Veblen, give it any im- 
portant place. In fact, it has no accepted place in 
modern accounting, where it appears only in the guise 
of depreciation. Industrialists learned about it, not from 
books, but the hard way. 

The role of obsolescence in the story of big business 
lies in three hard facts of economic life. First, only 
those companies who have consistently "thrown good 
money after bad," developing ever new products at 
ever better prices, have stayed in business. Second, in 
the competitive games that big businesses play, the 
price of the chips to stay in gets bigger and bigger. And 
third, no new development, no matter how many millions 
it costs, is a sure thing. It may be a flop and, unless its 
company has "other irons in the fire," the company will 
flop as well. 

One way "the bigs" meet these risks, or are able to 
take them, is through the diversification of their markets 
and their products. Another is through the continual 
development of new products. And back of this is 
"production research" or "applied research." 

Finally, still further supporting this, is "pure research." 



THE JOB OF BIG BUSINESS 153 

For this latter, only the members of the "billion-dollar 
club" with the very longest pocket-books can afford 
the price and the waiting. It takes millions of dollars 
and years of waiting before such investments pay off. 

Another way of discussing obsolescence is to reverse 
the emphasis and talk of "innovation. " For one man's 
obsolescence is due to another man's innovation. And 
as Barron' 's Magazine recently said, "There are apparently 
just two important roads to obtaining above-average 
prices. One is monopoly, the other innovation." It 
might have added that in fact there are only two ways 
to stay in business permanently: monopoly or innovation. 

Despite what is said in Washington, American big 
businesses have chosen the way of innovation. They 
have, in fact been forced to, in the sense that since some 
do, all must. There can be no lasting big monopolies 
where there are big innovators. Even legal monopolies 
are not safe, as the fate of the street cars and the diffi- 
culties of the railroads show. True monopoly and in- 
novation cannot long exist side by side. 

This is why the big American companies that seem to 
fit, in part, the traditional picture of monopolies in the 
control of all or nearly all of a certain product, like 
aluminum, do not and could not fit the rest of the tradi- 
tional monopoly picture, the holding down of production 
and holding up of prices. They too must keep on in- 
novating with new products, new uses, lower prices, 
expanded capacity, and so on. 

"The commercial results of being too grasping would 
in the long run be fatal," a big-business president has said. 
"For example I suppose it is quite literally true that if we 
elected to charge five times the present price of nylon 
yarns, we would find a market — a minute market, but 
nevertheless a market — and the profit per pound might 



154 THE JOB OF BIG BUSINESS 

be quite impressive. But our own interest and that of the 
consuming public leads us in the other direction" 3 
[Italics added.] 

In the recent House Judiciary hearings on "monopoly,'' 
committee members kept hammering on the question of 
whether big businesses crowd out little businesses. 4 But 
big businesses do not normally compete with little busi- 
nesses. They compete mostly with each other. The 
relations between big and little business are mostly those 
of buyer and seller, rather than of competitors. In other 
words, the large businesses do the large jobs, for which 
they are best qualified, and keep out of the little jobs, for 
which they are not. 

Thus, Standard Oil's biggest competitor is not the 
Jonesville Filling Station, but Socony- Vacuum, Gulf, or 
Shell. GM's threat is Ford, not Joe's Garage; GE's is 
Westinghouse, not a little-known electrical supply house. 
Only when a little fellow works up to big league size, 
as did Chrysler, Sylvania, Great Lakes Steel, Monsanto, 
Philip Morris, Pepsi-Cola, and Motorola, do they come 
into competition with the big fellows. 

Big business' own story on this was indicated by 
Charles E. {General Electric} Wilson, before the House 
Judiciary Subcommittee. He said, 

Where the objective to be undertaken is easily met, the 
company formed will be a small one; where the objective 
is large, the company must, in turn, be big. . . . There are 
many fields wherein small business is the only answer . . . 
and many more where small business, with its superior 
adaptability, is in a highly advantageous position. . . . 

That small business can compete . . . more than holding 
its own with big business ... is demonstrated in virtually 
every portion of our economy. ... In nearly every in- 
dustry [there are companies] which, like the following, are 
small, make a well-known product, compete with very large 



THE JOB OF BIG BUSINESS 155 

companies, and are eminently successful: Hormel Packing 
Company (canned meats), Webster Manufacturing Com- 
pany (record-changers), Brockway Truck Company, Mc- 
Graw Electric Company (toasters), Lincoln Electric Com- 
pany (welding equipment), General Tire Company, Western 
Tablet Company (paper), Hires (soft drinks), and Okonite 
Company (cable). 

A survey of "Business Size and the Public Interest," 
published by the National Association of Manufacturers, 
has said that certain figures "suggest that in manufactur- 
ing the large business firms differ from the small firms 
not only in size but qualitatively. The large companies 
in general are doing different jobs and using different 
methods." 

On the other hand, the inter-relation between big and 
little business may be shown by some of the big com- 
panies' estimates of their suppliers and customers. The 
Alcoa people say there are 18,000 firms who produce 
fabricated castings or otherwise use aluminum for the 
manufacture of products. The United States Steel Cor- 
poration has an estimated 50,000 small suppliers and 
90,000 small customers. The du Pont Company either 
buys from or sells to an estimated 80,000 suppliers or 
customers. General Electric has some 31,000 suppliers 
and sells to some 200,000 dealers through several thousand 
distributors. And census figures show that there are 
more men employed in the repairing, servicing and sell- 
ing of automobiles, which are essentially small business 
operations, than in their manufacturing. 

As President Benjamin F. Fairless of United States 
Steel said to the Monopoly Subcommittee, "If there is 
one economic lesson which our twentieth century ex- 
perience has demonstrated conclusively it is that America 
can no more survive and grow without big business 



156 THE JOB OF BIG BUSINESS 

than it can survive and grow without little business. . . . 
You cannot strengthen one by weakening the other. 
Big business needs small business; small business needs 
big business; and the nation needs both." 



20. Big Corporations 
and People 



Many people are afraid of what big corporations will 
do to the political and social life of the country. Senator 
Ralph Flanders once said he was disturbed because "No 
matter how well the big efficient corporations are eco- 
nomically justified, they cannot keep on growing with- 
out changing the social and economic system. . . ." 

The growth of big industry is already visibly changing 
the social landscape, just as did the original growth of 
manufacturing. Just as the farm town was converted 
into the old-fashioned mill town, so the mill town has 
been converted into the larger factory town or huge 
mill city, with mills and factories owned, perhaps, by 
strangers and run by "brass hats" in a distant metrop- 
olis. 

The problem of economic size is not new. Down 
through the centuries, technological advance has brought 
larger production units and larger production units and 
organizations have brought social and political change. 
The development of power tools in the eighteenth cen- 
tury brought the industrial revolution, rising from the 
mill. Railroads and new means of communication and 
recording have brought centralized administration. 
Nothing anywhere near as big as General Motors, the 

157 



158 BIG CORPORATIONS AND PEOPLE 

National City Bank, or the Social Security Administration 
would be possible without the latter. But for as long 
as there is written history, the question "How good is 
bigness?" has been at least a farm problem. The Roman 
Senate, the British Parliament, and the Soviet government 
have, in their turns, wrestled with the problem of large, 
efficient estates versus small family farms. 

By and large the historic pattern has been somewhat 
as follows. Progress of the industrial arts, to begin with, 
has brought new economies in the form of larger pro- 
duction units. These have begun to upset the existing 
social pattern. The struggle has, then, been over the 
question of whether the new economies should be 
abandoned so as to save the old social pattern, or whether 
new patterns could be worked out. And this is es- 
entially the question at stake now about big business: 
should it be hobbled or broken up into "one hundred 
steel companies instead of one United States Steel Cor- 
poration" or can adjustments to it be made? 

The first of these solutions, the "nostalgic approach," 
was expressed some years ago by Justice William O. 
Douglas, when he said, "Enormous spiritual sacrifices are 
made in the transformation of shopkeepers into employ- 
ees." This is the same feeling that Charlie Chaplin ex- 
pressed in his comical-tragic movie, "Modern Times," 
in which Charlie got lost in the machinery. 

The feeling seems to be that the village blacksmith 
who becomes an open-hearth furnace man, the inde- 
pendent oil dealer who becomes a uniformed salesman, 
the grocer who becomes a branch-manager for a chain, 
the small-town banker who becomes a big-town v.p., 
and the farmer who becomes an assembly-line worker 
have lost the spiritual advantages and satisfactions of 



BIG CORPORATIONS AND PEOPLE 159 

working for themselves. That many of them do not 
see it that way, is illustrated by the steady drift of 
farmers and their sons to the assembly lines, accelerated 
during the war. (Then there is the story of the C.I.O. 
assembly-line worker who turned down the offer of a 
job requiring more skill and attention, because his 
routine job left his mind free to think about the evils 
of capitalism and big business.) 

One reason why the big corporation can obtain a 
continuous supply of workers and hold them is because 
of the comparative security it can offer. (In fact, this 
brings up a curious contrast in the way many Washington 
people look at big business compared with the way 
they look at "social security," the "welfare state," and 
the "union shop." All are "paternalistic," to use a nearly 
forgotten word, both the security offered by big busi- 
ness employment and the last-mentioned programs. The 
main difference is that the latter are compulsory.) 

Few economists, particularly in Washington, seem to 
realize the vast difference between the mainspring that 
moved the "economic man" of classical economics and 
the one that drives modern corporate managements. It 
is still simply "the profit motive." But what a change 
has come about! The "economic man" was in business 
with the simple motive of the honest speculator: to buy 
as cheaply, sell as dear, and get out with as large a profit 
as possible. Or so he was imagined. With a few sinister 
lines added to the picture, his imagined modern counter- 
part, the big corporation, emerges as supposedly moved 
by arrogance, cunning, and greed. But this isn't neces- 
sarily so. The libretto used by many Washington 
politicians is opera-bouffe, or gaslight melodrama. 

By and large the predominant purpose of large corpo- 



160 BIG CORPORATIONS AND PEOPLE 

rate managements, in all their major policies, is to make 
sure the company will remain indefinitely in business. 
They don't keep the company in business to make profits, 
they see that it makes profits so it can stay in business. 
The aim is to keep the company's fences mended at all 
times on all fronts: competitive, financial, political, and 
ethical. When there is a choice, for the company, of 
more profits and less security, or more security (on 
these various fronts) and less profits, big-business execu- 
tives almost invariably choose the safe way. 

A long series of corporate policies are far more easily 
explained this way than in the conventional way. 
Among these are "administered prices," held down in 
boom times to protect the company's good name with 
customers and the public and held steady in bad times 
to protect the company from bankruptcy. Another is 
the maintenance of sound, rather than speculative, capital 
structures. Still others are the diversification of markets 
and products and the long-range planning and develop- 
ment of new products and heavy investments in re- 
search (sometimes called "the industry that produces 
industries"). 1 The recently increased investments in 
"public relations" on the community and national levels 
may be included here, too. 

Such essentially conservative and long-range policies 
are, in effect, the modem corporation's old-age security 
program for the organization itself. Insofar as they 
guarantee the company's own economic life, they en- 
able it to offer comparative security to employees in 
a shifting world. Young men who want security can 
start with such corporations with the reasonable prob- 
ability that so long as they do a fair day's work for a 
fair day's pay they can count on a pay-check as long as 
rhev work and a pension as long as they live. 



BIG CORPORATIONS AND PEOPLE 161 

The President of one of the very largest corporations, 
Standard Oil Company (N. J.) said a while ago: 

The American people . . . are testing various ways of 
protecting the individual against the more damaging effects 
of inevitable change. They are asking for constructive 
improvements which will defend the individual against 
forces too great for him to cope with. 

So far as the management of my own company is con- 
cerned, we have formed the habit of thinking and speaking 
in terms of "career employment" or "lifetime employment." 
That is our goal. We have reached a point todav where 
90 per cent of our employees — wage-rated as well as salaried 
— have been continually employed since the day they were 
hired. 2 

Corporate managements are still feeling their way in 
employee relations. One reason for this is that the 
modern corporation is something new under the sun. 
It has no historic precedent. Its managers have been 
preoccupied for a generation in learning the economic 
hazards to be avoided; for every lesson in corporate 
policy some big corporation has gone bankrupt. Only 
recently have managements achieved enough economic 
security for their firms to give them time to turn their 
attention to programs giving the employees economic 
security. They had to learn to economize before they 
could begin learning to socialize. 

But a great deal has been done. In recent years there 
has been much heart-searching in corporate manage- 
ments about the "gulf" between management and men. 
Polls have been taken, studies made, and new policies 
adopted. The upshot has been a not inconsiderable list 
of achievements by corporate management in their do- 
mestic relations. To an increasing extent they have be- 
come not only bosses, but fathers. Pension systems, 
suggestion systems, group bonus plans, improved up- 



162 BIG CORPORATIONS AND PEOPLE 

grading methods, in-plant training programs, plant hos- 
pitals, and house organs have expressed the new "social 
consciousness" of corporate managements. 

It may be said cynically that "they had to," or chari- 
tably, that they were big-hearted, or acidly, that "it 
pays." It comes to the same result. Big corporations 
are becoming social as well as economic institutions. 

Many people feel that because big corporations are 
not owned by the government, they are not responsible 
to anybody. Actually, the larger they are the more 
people they are responsible to. This is one of those 
cases in which "power" is also vulnerability. Wash- 
ington economists say big business has power over many 
people, but big businessmen say they "serve" many peo- 
ple. To sum it up, it is servant to as many people as 
it "dominates." 

The first of these responsibilities is of course the con- 
sumer or customer. As the president of du Pont has 
put it, "Every day is election day in American indus- 
try. The larger a company may be, the greater its need 
to satisfy more and more buyers to survive. Usefulness 
is the test of whether a company shall stay big. Cer- 
tainly a company will not grow big unless it is useful, 
nor stay big unless it continues so. The only power 
corporations have, big or small, is the right to stand in 
the market place and cry their wares." 

They are also responsible to their stockholders, their 
employees and their unions, and to local and national 
opinion. They are also accountable, in varying degrees, 
to the Bureau of Internal Revenue, the Securities and 
Exchange Commission, the National Labor Relations 
Board, the Wage and Hour Administration, the Social 
Security Board, and probably to several other govern- 
ment departments. 



BIG CORPORATIONS AND PEOPLE 163 

A popular fashion today is the drawing of "organiza- 
tion charts," or "work charts," showing lines of authority. 
Government departments go in for them particularly, 
with neat lines and boxes showing what agencies, di- 
visions, bureaus and so on are under whom, over whom, 
and responsible to whom. Since big private businesses 
aren't in the government's chart, some people assume 
that they are not responsible to "the people." 

This is, essentially, the idea of socialism. It is being 
carried forward fast in Great Britain with the "national- 
ization" of industry. It is based on the assumption that 
there can be no responsibility without, so to speak, a 
line on a work chart leading up from each industry to 
the central government, from which in turn a line of 
responsibility leads directly to the top box of all, the 
ballot box. 

It is difficult enough for the millions of owners of the 
large corporations to keep up with what is going on, 
despite the efforts of the management to keep them in- 
formed. It would be many times more difficult for the 
entire electorate, as "owners," to keep up with what is 
going on. It is doubtful if public opinion has as much 
influence, for instance, on the policies of the Commodity 
Credit Corporation, the Reconstruction Finance Corpo- 
ration, the Maritime Commission, or the Bureau of Recla- 
mation, as it has on Jersey, Steel, GM, or GE. But 
the public "owns" the first four of these huge "con- 
centrations of economic power," and the other four are 
"privately owned." 



2i. "Break 'Em Up" 



The Antitrust Division has launched on the mass pro- 
duction of breakup suits against leading American com- 
panies. The outcome is about as certain as that of a 
game of billiards played by a man using a lopsided cue 
and an elliptical ball on an uneven table. No one knows 
how long the cases will take, nor how many more will 
be brought, nor whether other companies will take their 
cases to the public as A&P has done and what the out- 
come of that would be if they did. 

Following are some of the leading "divorce, divestiture, 
and dissolution" suits already brought: 

To divide the four leading meat-packers (Armour & 
Company, Swift & Company, the Cudahy Packing Com- 
pany, and Wilson & Company, Inc.) into 14 "separate and 
competing" companies; 

To force the American Telephone & Telegraph Com- 
pany to sever relations with its manufacturing company, 
the Western Electric Company, of which it owns 99 
per cent, and to break up Western Electric into three 
competing companies; 

To require that the General Electric Company dis- 
pose of half of its Lamp Department; 

To break up the A&P system both vertically and 
horizontally, separating its manufacturing and its buying 
departments from its retail department and breaking 

164 



"BREAK 'EM UP" 165 

up its retailing division into seven independent geo- 
graphical divisions; 

To cause seven leading major integrated oil companies, 
on the Pacific Coast to divest themselves of their market- 
ing assets and operations and to operate their transporta- 
tion facilities as public utilities. (Attorney-General J. 
Howard McGrath stated, shortly after the suit was 
filed, "We're going to file similar suits in other regions, 
probably without waiting for a decision in the case 
here.") 

The Department of Justice has also been reported 
preparing to file suit to compel the United States Steel 
Corporation to divest itself of various subsidiary com- 
panies which mine coal, operate merchant ships, and 
fabricate steel. 

Presumably these suits are the result of the Supreme 
Court's recent favorable decisions, in several cases, in 
which it indicated at least partial dismemberment of the 
defendant company, 1 coupled with the Alcoa case (single 
company), the Tobacco case (three companies), and 
the Circuit Court's decision in the A&P case. What- 
ever the sources, an Assistant Attorney-General has 
repeatedly said that he believed the Antitrust Division 
already had power, under existing interpretations of the 
Sherman Act, to break up the Big Three's and Four's 
of industry. 

As the law is now interpreted, no antitrust lawyer 
appears willing to guess who next may be attacked. The 
new legal concepts of "exclusion," "conspiracy," "in- 
tent," and "monopoly" are now so sweeping that prac- 
tically any large business appears likely to be found 
guilty anyway whenever the Antitrust Division might 
bring suit for divorce, divestiture, and dissolution. 

Moreover, something further has been added to anti- 



166 "BREAK 'EM UP" 

trust history. Until recent years the Antitrust Division 
rarely asked for divestiture as a penalty and it was even 
more rarely granted. It generally asked for fine and 
imprisonment and got a fine. (The company of course 
also suffered damage to its good name, plus court costs, 
danger of treble-damage suits, and so on, even though 
it had abandoned the illegal practice some time before.) 
The idea generally was "make the penalty fit the crime." 

Now, however, the Supreme Court has shown in a 
number of cases that it will grant divestiture much more 
frequently. In the Schine case 2 it said, ". . . We start 
from the premise that an injunction against future viola- 
tions is not adequate to protect the public interest. If 
all that was done was to forbid a repetition of the illegal 
conduct, those who had unlawfully built their empires 
could preserve them intact. . . . Such a course would 
make enforcement of the Sherman Act a futile thing 
unless perchance the United States moved in at the in- 
cipient stages of the unlawful project. For these reasons 
divestiture or dissolution is an essential feature of these 
decrees." 

So it looks as though Antitrust will, after this, ask the 
rj Court for divestiture in an increasing proportion of its 
/ cases. To sum up the situation, Antitrust is ( 1 ) bring- 
ing more cases; (2) winning a larger percentage of 
them; and (3) appears likely to ask for divestiture in 
a larger percentage of its victories. 

All this means that the Supreme Court has given the 
Antitrust Division of the Department of Justice an 
extraordinary power over the leading American firms. 
The Department decides first whom to file suit against; 
then, when it wins the case, it practically decides how 
the losing company is to be broken up. 

In a divestiture case, the Supreme Court eventually 



"BREAK 'EM UP" 167 

leaves the business of making the final order to the lower 
court. But lower court judges are busy. They turn 
the matter over to the antitrust lawyers and the de- 
feated company lawyers to work it out. Since the 
judges cannot be economists as well, they have little 
choice but to turn over the general economic principles 
of the breakup to the antitrust lawyers. 

The government lawyers have an almost limitless 
choice of forms in which to demand divestiture. They 
can divide a company "horizontally," "vertically," or 
both, and in varying proportions. In the General Elec- 
tric lamp case, they set 50 per cent of the company's 
business as the amount it should drop. This was jotted 
down by some antitrust lawyers in New York as one 
more clue to the inscrutable mind of the Antitrust Di- 
vision economists. Perhaps they picked it out of the 
air. Congress has laid down no rules or principles con- 
cerning how a company should be broken up — let alone 
as to why it should be broken up. 

The Supreme Court has given Congress many broad 
hints on issues which some of its members, at various 
times, have felt Congress ought to decide (and not leave 
to the Court). Many were given in Chapter 2 of this 
book. The majority in the Columbia Steel case, in an- 
other instance, said, "It is not for the courts to determine 
the course of the Nation's economic development. . . . 
If businesses are to be forbidden from entering into dif- 
ferent stages of production that order must come from 
Congress, not the courts." 3 

Justice Jackson, in the Standard of California case, 4 
said, 

I regard it as unfortunate that the Clayton Act submits 
such economic issues to judicial determination. It not only 
leaves the law vague as a warning or guide, but the judicial 



168 "BREAK EM UP" 

process is not well adapted to exploration of such industry- 
wide, and even nation-wide questions. 

Were Congress to look into this matter, it would have 
to consider three major and quite different questions. 
First, it would have to consider whether the Court 
was wise, in the Schine case, in saying that "an injunction 
against future violations [of the Sherman Act] is not 
adequate to protect the public interest." If it were wise, 
then practically any company found violating the Act 
is subject to divestiture. If it were not, then Congress 
might well try writing a statutory definition of what 
kind of violations in what kind of circumstances should 
be followed by an order of divestiture. 

Secondly, Congress might define what categories of 
companies ought to be amputated or broken up. Should 
they be defined by mere size and, if so, size of assets, 
or volume of sales? Or should this be made different 
for different industries? And what should be the limits 
on size? Should the offense be measured by a com- 
pany's importance in its industry? If so, should the 
test be position in the industry (largest, the two largest, 
three, four or 20 largest?), or by percentage of the in- 
dustry (and if so, what percentage?)? And how define 
industry? All of these measures have disadvantages. 

A limit on mere size would make for fewer companies 
large enough to take sizable technological risks, or to 
invest in basic or fundamental research. On the other 
hand, the breakup of the first, or first two, or first three 
companies, in an industry might be like requiring the 
railroads to take off all the front cars from their trains. 
There would still be front cars — and largest companies. 

Perhaps most clearly dangerous would be to limit the 
proportion of the assets or sales of an industry that any 
company might control. Cartels do that. The Wall 
Street journal has commented, 



"BREAK 'EM UP" 169 

[Under] such conditions why would U. S. Steel be inter- 
ested in cutting prices, assuming it had all the business it could 
be allowed to do? . . . And if the largest factor in the . . . 
industry were [thus] removed from the competitive race 
why would the other producers deem it necessary to hustle 
themselves . . . ? 

To make such a limit in the name of promoting competi- 
tion would seem fatuous. The Sherman Act would come 
round full circle and meet itself head on. 

The third thing which Congress would need to con- 
sider about the dismemberment of corporations would 
of course be an aspect of the same question: what is the 
ideal length, breadth, and shape of the Procrustean bed 
on which they are to be measured. In this case, Congress 
would be dealing in minimums instead of maximums. 
To what minimum should the antitrust lawyers be per- 
mitted to reduce American industry? 

Here again, the danger of weakening competition in 
the name of strengthening it would come up in as just 
an acute form. For instance, there is nothing in the 
law today to prevent the antitrust lawyers, once having 
w r on a divestiture decree, from (a) breaking A&P down 
into 5,000 separately owned stores; (*>) breaking the 
U. S. Steel down into individually-incorporated mills; 
(c) breaking oil refining down into pressure-and- thermal 
cracking, catalytic cracking, fractionating, condensing, 
and boosting plants. In fact, there is nothing in the 
law on the subject anyway — "period." 

Even the onset of such legislation would probably 
discourage many expansion programs and new develop- 
ments. The effect would be like the natural reaction 
of the du Pont management to Antitrust's suit against 
du Pont for "monopolizing" cellophane. The huge, new 
expansion programs of the big steel companies to de- 
velop new ore and taconite reserves would have to be 



170 "BREAK 'EM UP" 

re-examined carefully, lest in the future they become 
retroactively illegal. The possibility that Congress might 
authorize the dismemberment of large "conglomerate" 
companies (like General Motors, which makes cars, re- 
frigerators, and Diesel locomotives) might not cause 
GM to quit research on Diesels, which it introduced to 
the railroads some years ago. But it certainly would 
cause GM to think twice before launching another such 
venture not obviously related to the automobile business. 
This in turn could be embarrassing to the national 
defense, as many of Antitrust's trust-busting activities 
were to the national defense program ten years ago, 
until they were headed off in 1942 by the Smaller War 
Plants Corporation Act. Hence, as stated at the be- 
ginning of the chapter, the outcome of the present 
Sherman Act divestiture program of the Department 
of Justice, is about as uncertain as the prospects of a 
man playing billiards on an uneven table with an elliptical 
ball and a lopsided cue. 



n. How the Government 
Wins Its Cases 



President Truman once said, "I know that it would 
be easier to catch and jail criminals if we did not have 
a Bill of Rights. But," he went on, "I thank God every 
day . . . that that Bill of Rights is fundamental law." 

But as far as business and the Sherman Antitrust Act 
are concerned, the Department of Justice has practically 
riddled the Bill of Rights. The letter of the law is still 
there. But the spirit is gone. 

Article 4 of the Bill of Rights says: 

The right of the people to be secure in their persons, 
houses, papers and effects, against unreasonable searches and 
seizures, shall not be violated, and no warrant shall issue but 
upon probable cause, supported by oath or affirmation, and 
particularly describing the place to be searched, and the per- 
son or things to be seized. 

The Antitrust Division can and has made itself so 
troublesome to corporations through vague subpoenas 
for vaguely defined papers referring to vaguely defined 
fctrarges that the corporation today usually in the end 
/opens all its files, the Antitrust men swarm through, 
and they carry off or photostat records by the tens of 
thousands and the truckloads. 

Ten years ago Antitrust went through the offices of 

171 



172 HOW GOVERNMENT WINS CASES 

the Standard Oil Company (N. J.). They took 47,000 
documents involving 65,000 separate pages. In the 
Madison Oil case, 1 they took 18 truckloads of documents 
from the defendant companies. In the A&P case, as 
already reported, they examined 2,000,000 documents, 
photostated 50,000, and submitted 5,000 of these at the 
trial. 

In February, 1950, the Division asked the Sun Oil 
Company for information on year-by-year sales volume 
for gasoline, lubricating oils, and automobile accessories 
in each of the 18 states and the District of Columbia, 
where it operates, for the period 1929-1949 inclusive, 
and other information. The company's answer filled 
157 pages. The company left only one of 16 questions 
unanswered; Antitrust wanted the names of dealers whose 
contracts had been terminated against their wishes dur- 
ing the last 13 years. (This would probably be a gold- 
mine of complaints) . The company said Antitrust could 
have the keys to the warehouse and dig out the names 
themselves. 

Antitrust is not the only government agency that does 
this. In the late 1930's the Federal Communications 
Commission's investigators pulled out all the drawers in 
the telephone company's head office. The cost of the in- 
vestigation to the government was $1,500,000. AT&T 
officials estimated it cost the company $2,500,000. The 
resultant 1939 "Report of the Investigation of the Tele- 
phone Industry" was an economic farce. It recom- 
mended that AT&T increase depreciation, reduce rates 
and maintain the dividend — all at the same time. 

These "fishing expeditions" are a field-day for Antitrust 
lawyers. More than one businessman has commented to 
this writer that "It's too bad businessmen ever learned 
to write." No batch in the world of tens of thousands 



HOW GOVERNMENT WINS CASES 173 

of papers would fail to yield some documents which, 
torn from their contexts and pieced together adroitly, 
would not make out a bad case against their corporate 
owners. 

Most troublesome of all are the inter-office memos of 
over-smart subordinates who, to gain favor with their 
superior officers, make reports of their shrewd disposal 
of government officials, competitors, and so on, bearing 
often no relation to the corporation's actual policies. 

But there is more trouble to come. The law strictly 
limits the use of subpoenaed documents to actual court 
proceedings, where they are admissible only under the 
legal rules of evidence, which are designed to protect the 
individual against a powerful government. 

But the law does not prevent a Congressional Commit- 
tee from subpoenaing the documents in turn from Anti- 
trust and spreading them on the record. Nor is there 
anybody to prevent Antitrust from letting some friendly 
newspapermen look over the documents. A great deal 
of inside information about corporations has been pub- 
lished in recent years by newspapermen who have never 
visited with the victim corporation even by telephone. 
"They didn't get it from us," corporate officials have 
time and again told this writer. "They've never been 
round to see us and they've never even telephoned to 
check for accuracy." 

There is still more to it. The cases have grown so 
huge that no judges could ever get through them. The 
files in the Alcoa case filled one side of the courtroom. 
In the Cement case, the trial examiner's hearing took three 
years and produced 49,000 pages of testimony and 50,000 
pages of exhibits. (Equal to about 400 books of this 
size and probably duller.) 

There is only one result possible. Judges are human. 



174 HOW GOVERNMENT WINS CASES 

As a New York lawyer recently said, "the enormous 
size to which records in antitrust cases have grown has 
reached a point where the issues have almost ceased to 
be justiciable." 2 The judges take the government 
lawyers' word for it. And that word is "guilty." 

Article 6 of the Bill of Rights says in part: 

"In all criminal prosecution, the accused shall enjoy 

the right to a speedy and public trial, by an impartial 

jury of the State and district wherein the crime shall 

have been committed. ..." 

And this echoes not only Anglo-Saxon common law, 
but also the complaint in the Declaration of Independ- 
ence against George III "for transporting us beyond seas 
to be tried for pretended offenses." 

But most antitrust cases involve companies whose 
operations or markets are widely scattered. So Anti- 
trust brings its indictments almost anywhere it wants to. 
And its choice of "venue" (place of trial) is highly 
significant. 

A cautiously worded statement of this was made some 
years ago by an Antitrust official. He said, "If there 
is a choice of jurisdiction, it is advisable to confer with 
the district attorney in the prospective district and, if 
possible with the judge, to see whether there are any 
objections to proceeding there." 3 

So Antitrust brought the first big case against the oil 
companies in Madison, Wisconsin. None of them pro- 
duced or refined there and the complaints only remotely 
involved Wisconsin. But Wisconsin is a state of farmers, 
with a long record of radical legislation and fear of busi- 
ness. More than that, jurors in the Madison case were 
warned that it would be a long one and those with much 
business were let off. Thus, profound and intricate 
matters of antitrust law and oil industry trade practice 



HOW GOVERNMENT WINS CASES 175 

were heard by a jury, few of whose members had a high- 
school education. 

Likewise, the automobile financing cases against Ford, 
Chrysler, General Motors, and the big financing com- 
panies were brought in Milwaukee, though the business 
heads up in Detroit. The Pullman Company, with its 
head office in Chicago, was indicted in Philadelphia, home 
of its chief competitor. The Big Three cigarette com- 
panies were indicted in Kentucky, where the farmers 
grow tobacco, though their offices and plants are largely 
in Virginia and the Carolinas. The A&P was indicted 
in Dallas, in the home-state of Wright Patman, implacable 
foe of the chains, and A&P's officers had to travel back 
and forth the 1,600 miles from the head office in New 
York (or move to Dallas "for the duration)." The du 
Pont people, their head office in Wilmington, Delaware, 
and their chief operations in the East, were indicted in 
Chicago. Du Pont asked that the venue be moved to 
Wilmington, but the Supreme Court refused. 

The story has already been told 4 of how the judge in 
Dallas threw out the Antitrust lawyers' case against the 
A&P because it contained "inflammatory statements" that 
he wouldn't let be presented to the jury. Yet almost ten 
years earlier the Antitrust lawyers had been royally 
bawled out by the Supreme Court itself for the same 
thing, in the Madison case. 

Said the Antitrust lawyers in that case to the poorly 
educated jury: it is a "terrible thing that a group of 
influential, wealthy millionaires or billionaires should 
take over the power, take over the control, the power to 
make prices . . . malefactors of great wealth . . . eager, 
grasping men . . . [corporations] who take the law 
into their own hands . . . without any consideration for 
the under-dog or the poor man. . . . We are going to 



176 HOW GOVERNMENT WINS CASES 

stop it, as our forefathers stopped it before us . . .or we 
are going down to ruin as did the Roman Empire." 
(The "crime" of the companies had been to steady the 
price of gasoline during NRA days, at the request of 
the government, so as to save a number of little inde- 
pendent refiners from going to the wall.) 

Said the judge to the jury: ". . . any man of wealth 
has just as much standing in a court as a man that is 
poverty-stricken . . . Whether a man be rich or poor, 
he is entitled to the same consideration in this court . . ." 

Said the Supreme Court majority: ". . . appeals to 
class prejudice are highly improper and cannot be con- 
doned and trial courts should ever be alert to prevent 
them. Some of the statements fall in this class. They 
were, we think, undignified and intemperate. They do 
not comport with the standards of propriety to be ex- 
pected of the prosecutor." 

And said Justice Roberts dissenting: "... I think the 
closing address of . . . the Government is ground for 
setting aside the verdict. . . . The final . . . address 
covers 28 pages . . . about five refer to the facts. . . . 
The balance consists largely of what the speaker himself 
characterized as 'clowning,' ... At many points coun- 
sel should have been stopped by the Court. . . ." 

A Sherman Act "consent decree" amounts to an agree- 
ment between Antitrust and one or several corporations 
and their officers that these firms will abide by certain 
rules laid down by Antitrust. It is a civil process and 
takes only a day in court. In the late 1930's the Anti- 
trust lawyers began using the threat of criminal indict- 
ments to extort consent decrees. 

An outstanding instance was the so-called "Geiger 
case" in 1937. 



HOW GOVERNMENT WINS CASES 177 

Antitrust had brought criminal charges before a Mil- 
waukee Grand Jury sitting under the late Judge Frank 
A. Geiger, against the leading automobile and automo- 
bile finance companies. Grand Jury proceedings are 
supposed to be secret. Grand Jurors are not supposed 
to "even tell their wives" what goes on. Least of all, 
is it to be revealed to those against whom the city, state, 
or federal attorneys seek a bill of indictment. Two 
months after the Milwaukee Grand Jury began hearing 
the Antitrust Division's charges, the companies involved 
were invited to Washington by Antitrust. iMeantime, 
it recessed its presentation in Milwaukee. 

Cautiously Antitrust lifted the veil of secrecy, enough 
to show the companies, or at least to make them think, 
that the jury was "rarin' to indict." But (they were 
allowed to surmise) if the companies would sign a con- 
sent decree, on Antitrust terms, all would be forgiven. 
This is a hard knuckle to rub in a corporation executive's 
ribs and was even more so, then, because business officials 
had not become hardened to having the word "criminal" 
applied to them. 

General Motors refused to accept a consent decree, its 
counsel explaining that "... even under the threat of 
criminal proceedings [later brought in South Bend] we 
prefer to have our rights and obligations determined in 
an atmosphere free from coercion. . . ." When the 
judge got wind of how his Grand Jury proceedings were 
being used in Washington he called in all the lawyers, 
said such a thing was "against all the proprieties," and 
then and there dismissed the Grand Jury. 

The Justice Department then went to the House Ju- 
diciary Committee and tried to get the judge unseated. 
The Wisconsin Bar Association then sent men to Wash- 
ington, who upheld the judge's personal dignity and 



178 HOW GOVERNMENT WINS CASES 

called his action "plainly in furtherance of justice." The 
Judiciary Committee let the matter drop. 

Since the war, the Antitrust Division has been writing 
more and more consent decrees, which have become more 
and more elaborate. By no means does everything that 
is written into these decrees represent a writing of com- 
mercial practice legislation by the Antitrust lawyers. A 
part of the promises signed by business are on the nature 
of "I promise not to stick pins in little children." A 
New York lawyer recently said: 

One who has studied the consent decrees . . . entered 
since V-J Day will be horrified by the practices described, 
unless he is sufficiently sophisticated to know that the De- 
partment makes a point of including in consent judgments 
not only the things which industry has been engaged in 
doing but the things which it has been suspected or accused 
of doing; and it then embodies these in elaborate injunctions 
which are made to appear as if they were present realities. 5 

Article I, Section 9.3 of the Constitution of the United 
States says, in part: "No ... ex post facto law shall be 
passed." That means that a man may not be punished 
for something which was legal when he did it, but is 
later made illegal. For instance, under the law passed 
in January 1934 against hoarding gold, he could not be 
punished for having hoarded it in 1932. 

In theory, a law like the Sherman Act means the same 
today as when it was written in 1890. But everybody 
knows better. Business policies of years ago, which 
everybody then thought entirely legal, are now con- 
sidered illegal, and the interpretation extends backward. 
It is as though a man who made a right turn on a red 
light when it was considered legal, was later punished 
for this turn when such turns were made illegal. 

The statute of limitations would mercifully cut this 






HOW GOVERNMENT WINS CASES 179 

menace off after three years, if it were not for two things. 
In the first place, the Supreme Court now allows evi- 
dence from the long-dead past to be dug up by the 
Antitrust Division and used to show a "pattern" or "state 
of mind" that is then applied to the previous three years. 
Thus, in the Pullman case, G a resolution of the Board of 
Directors of Pullman in 1870 was relied on in finding the 
"intent to monopolize." 

And, in the second place, antitrust cases often take 
many more years than three from indictment to final 
decision; meantime the law is reinterpreted. An example 
was the Carboloy case, already mentioned, which went 
as follows: 

In 1926, a unanimous Supreme Court sustained Gen- 
eral Electric in using a certain type of license contract. 
In 1928, Carboloy and other companies set up a similar 
license contract. Antitrust indicted Carboloy in 1941, 
charging that this contract was illegal. The case didn't 
finally go to trial until early in 1947. All this time, the 
doctrine of the 1926 General Electric case had been con- 
sistently applied by the lower courts and never shaken 
in the Supreme Court. But in the year and a half after 
trial before the judge got round to handing down his 
decision, the Supreme Court handed down three major 
decisions (Line Material, Gypsum, and Paramount), 
sharply narrowing the 1926 decision. Perhaps the judge 
was waiting to see what the Supreme Court would do. 
Anyway he found the defendants guilty, largely on the 
basis of these three decisions, including the president of 
Carboloy who hadn't been with the company at the 
time the original contract was made. The Antitrust 
lawyers asked for jail sentences, but the judge wouldn't 
go that far. 



23. Arm Chair Economics 



At the turn of the century, in 1899, a timid, retiring 
college professor at the University of Chicago, named 
Thorstein Veblen, wrote an extraordinary little book 
called The Theory of the Leisure Class. 1 The "Reign 
of Gilt" of the 1890's was just tapering off, a period in 
which the womenfolk of newly rich men drove a hard 
pace in showing off their money. This generation of 
women is still caricatured in Jiggs' wife, Maggie, and 
their daughter. They practiced "conspicuous consump- 
tion" and "conspicuous leisure" as they had not been 
practiced in America since the tobacco planters of the 
James peninsula moved their daughters into Williams- 
burgh to get them married. The two phrases are 
Veblen's, his unique contribution to the American lan- 
guage. 

Veblen was bitter about it. A later publisher's blurb 
called his book "The most embarrassing book that an 
intelligent person can read," and said that it revealed 
"the hollo wness of our canons of taste, education, dress, 
and culture, and the emptiness of those habits of life and 
thought which we like to regard as our strength." 

Veblen did not know anything about American busi- 
ness except what he had read. He had never been in it. 
But he didn't like it, any more than he seems to have 
liked expensively dressed women or college governing 

180 



ARM CHAIR ECONOMICS 181 

boards, with whom he didn't always get along. And in 
a brilliant, wordy, polysyllabic, pseudo-objective style 
he managed to tie together almost inextricably in the 
minds of his readers the leisure class and the American 
business world. 

This was no mean achievement in this country; though 
it would have been as plain as day in Europe. He did 
it by the extraordinary feat of inventing from scratch 
almost a complete idiom, built round such words as 
"pecuniary," "predatory," and "parasitic." And these 
he draped about the neck of American business, where 
they still stick. 

The book did not go too well at first. He wrote sev- 
eral others and then in 1919 he published in the Dial a 
series of articles, which were later reprinted as The En- 
gineers and the Price System. 2 By now his attack on 
business and the profit system had crystallized. His style 
now sounded somewhat less like an ethnologist studying 
Hottentots and more like a cross between George Ade 
and Ring Lardner in the latter's most sardonic moments. 
Veblen took to capitalizing the phrases "Vested Inter- 
ests" and "Guardians of the Vested Interests," as opposed 
to "Production Engineers" and "Production Economists." 
He advocated a Soviet of Technicians, and thus more than 
anybody else wove the spell for "technocracy." 

His thesis was that the growth of American industry 
was being rapidly disordered by the "captains of indus- 
try" who are "unremittingly engaged in a routine of 
acquisition, in which they habitually reach their ends by 
a shrewd restriction of output." He called this "sabo- 
tage," but hastened to explain that he didn't mean it 
wasn't respectable, of course. In this series of essays, 
America was to be saved from the "Guardians of the 
Vested Interests" (alias the "captains of finance" or 



182 ARM CHAIR ECONOAUCS 

"captains of industry") by the "Production Engineers'' 
and "Production Economists." 

"Engineers and the Price System" was not as pert as 
"Leisure Class." Hardly anybody but intellectuals 
bought it. The "captains of industry" knew no more 
about Veblen than Veblen knew about them. Time 
passed. Came the "New Era." And then came the 
depression. And now, the stone which the builders re- 
jected, became the head of the corner. It is doubtful 
if any writer had anywhere near as much influence as 
Veblen on the economic idiom and strange concepts of 
business which developed in Washington in the 1930's. 
Compared to Veblen, Karl Marx wasn't even in the run- 
ning. Business executives, who started to read "Das 
Kapital" to find out from where the blizzard started, 
never knew what hit them. 

Veblen's idiom began to crop up in reports of the Se- 
curities and Exchange Commission, written by Supreme 
Court Justice William O. Douglas, then head of the SEC's 
protective committee study. But it was not so much 
Veblen's high-sounding language that mattered. It was 
his ideas. Here were the germs of the ideas of such 
odious things as "administered prices," "monopolistic 
competition," and "oligopoly." 

Compare these ideas, for instance, with Veblen's re- 
mark in "Engineers and the Price System" that the exist- 
ing business system, "having begun as an industrial com- 
munity . . . centered about an open market . . . has 
matured into a community of Vested Interests whose 
vested right it is to keep up prices by a short supply in 
a closed market." Is that not, with slight embellishment, 
the "virulent growth of monopoly power"? Veblen 
never would have used the word "virulent"; he would 
take a page to get round such outspokenness; but he 



ARM CHAIR ECONOMICS 183 

made the feeling show through. He wrote as though 
under a censorship. His followers didn't. 

Veblen's ideas spread through Washington like a 
fashion — or else the intellectuals who had read them 
came to Washington and became its economic oracles. 
Beginning in 1934, they began to develop the idea that 
business was getting more and more concentrated in 
fewer and fewer hands and that this was not only an evil 
in itself but that it restricted competition. 

In 1938, the Temporary National Economic Commit- 
tee became a loudspeaker for the broadcasting of such 
new terms as "concerted action," "common course of 
action," "dominant position," "economic power," 
"monopolistic competition," and "oligopoly." The 
Antitrust Division lawyers, led by Thurman Arnold, 
were quick to capitalize the new lingo. In their briefs 
they began to use "dominant position" as a synonym for 
"monopoly," and "concerted action" and "common 
course of action" for "conspiracy" and "collusion." 

After a while they got the judges using such phrases, 
though only in the course of their opinions, but not as 
a premise on which they based their decisions. But this 
gave more weight to the arguments of the Antitrust 
lawyers and finally, starting with the Alcoa case, the 
courts began talking "economics" in lieu of law: in other 
words, this brand of "economics" began to become the 
law. 

Thus, the ideas about business of a timid but brilliant 
professor who didn't know anything about it, but did 
know how to cast a spell, are now becoming the law of 
the land. Unhappily, the chief reason is ignorance, or 
what the public opinion pollsters call a "vacuum of in- 
formation." These ideas seem to have been developed 
largely by people who don't know anything about busi- 



184 ARM CHAIR ECONOMICS 

ness except from reading books about it by other people 
who don't know anything about it. 

A single instance must suffice. The foremost critic of 
the oil industry today — or at least the most feared by the 
industry — is Professor Eugene V. Rostow. He wrote 
a book recently at Yale on the oil industry, as part of a 
series of "Studies in National Policy" being made by 
members of Yale's Departments of Economics and of 
Political Science and its School of Law. 3 

Funds for the project were furnished by the Carnegie 
Corporation and the Ganson Goodyear Depew Memorial 
Fund. The author is Professor of Law and a member 
of the Graduate Faculty of Economics at Yale University. 
The study, according to the jacket "considers in detail 
proposals for reorganizing the oil industry under the 
antitrust laws in the interest of achieving the social, 
economic, and political advantages of more competition." 

Oil men promptly began to peruse this "study," and 
were appalled by the errors. A subcommittee of the Oil 
Industry Information Committee assembled a thick folio 
of "errata" in the book. Typical comments were the 
following: 

Rostow: The strong, separate regional Standard Oil com- 
panies, all integrated, and almost entirely non-competi- 
tive, . . . 

Committee Comment: (1) The Standard Oil Company 
(Kentucky) and the Standard Oil Company of Kansas are 
not integrated units today. (2) Contrary to the above 
statement . . . there are at least two of the original Stand- 
ard Oil companies competing in every state of the union, 
there is an average of almost 4% of the original companies 
in each state, and in some states there are as many as 6 of 
the original companies in direct competition. 

Rostow: . . . the measure of refining capacity is ... an 
arbitrary one, being the amount which could be produced if 



ARM CHAIR ECONOMICS 185 

all the refineries worked a one shift day, six days a week. 

Committee: Refineries of necessity must operate 24 hours 

a day, seven days a week except for planned shutdowns. 

One oil man, reviewing the book in the Yale Law 
Journal, called it ". . . unencumbered by the funda- 
mental facts . . .so many erroneous statements it would 
require a book ... to recite them . . . fantastic! . . ." 4 

Lowell Mason, the incorrigible minority on the Fed- 
eral Trade Commission, recently said "When I hear 
bureaucrats talking about conscious parallelism of action, 
when I hear them say we must save commercial busi- 
ness . . . bunk has at last reached its saturation point." 5 



24. The Folklore of 
Trust-Busting 



This book has been written in the New Hampshire 
woods. One evening the author took a walk, by the 
pale of the moon and without flashlight, down an old 
familiar road. It was a pleasant road that he had walked 
down many a time in the sunlight. But in the darkness, 
the trees and fence posts looked like hobgoblins wait- 
ing to reach out for him. An old apple tree off which 
he had picked many a juicy apple looked like a savage 
and dangerous enemy. 

And he thought about how the everyday business 
world is transformed, when some people talk about it, 
into a darkness peopled by hobgoblins in the form of 
predators, plunderers, parasites, and "vested interests" — 
great shapeless horrors in top hats, with pink, clutching 
hands, monopolists, oligopolists, and greedy corporations. 
An octopus waves his tentacles from Wall Street, and 
big bad corporate wolves lie in wait with long teeth for 
Little Business. The theme of this bedtime horror story 
is that the public, the consumer, the wage-earner, and/or 
little-business are like Little Red Riding Hood carrying 
her basket of groceries through the wood. "Why, 
Grandma, what great big teeth you have!" 

It is a Jack-the-Giant-Killer story, in which Big Busi- 

186 



THE FOLKLORE OF TRUST-BUSTING 187 

ness is always the Giant, and business-baiting Congress- 
men play the role of Jack; it is a David-and-Goliath story 
in which Big Business is the arrogant Goliath and gov- 
ernment lawyers play David with his sling-shot. For 
back of all this legislation and interpretation and eco- 
nomic theory is the fear of big — meaning powerful — 
privately owned corporations. It is against them that 
Congress wrote the Robinson-Patman Act, that the Fed- 
eral Trade Commission has attacked quantity discounts, 
freight absorption and good-faith price competition, that 
the Supreme Court has invented the crime of "monopoly 
power" and that the Department of Justice has attacked 
the A&P. 

Back of all this queer law and queer economics is the 
queer feeling that large successful businesses are a danger 
to the community. Everything they do, in this dark- 
of-the-moon frightened view, is a threat. If they raise 
prices, it hurts the consumer. If they lower prices, it 
hurts the little competitor. If they expand, they are 
getting too big; if they don't expand, they are sabotaging 
the country's growth for their own ulterior monopolistic 
purposes. 

Americans have long been ambivalent about bigness. 
They have loved it and feared it. On the one hand 
they have built and boasted of the biggest buildings, the 
biggest canals, the biggest factories, and the biggest rail- 
road systems, steel mills, power plants and assembly lines 
in the world. On the other hand, since the days when 
Andrew Jackson broke up the second Bank of the United 
States, they have feared the big corporations that have 
made these things possible. In the 1880's, it was the 
railroads they feared most; in the 1890's, the trusts; in 
the 1900's, J. P. Morgan. Then it was Wall Street, and 
now it is "big business" in general. 



188 THE FOLKLORE OF TRUST-BUSTING 

Previous chapters have described attacks on an almost 
unbelievably long series of American business practices, 
methods, and forms of organization. Superficially it 
would seem that it is these specific practices, methods and 
forms of organization which are questioned. But like 
the child who saw the king walk by in his imaginary 
clothes and naively said, "Why, he has nothing on at 
all," so the layman is likely to conclude, "Why, there is 
nothing right about business at all." And such, in fact, 
appears to be the case. The attacks are on such varie- 
gated things that they appear to be merely parts of one 
all-out attack, not really on what successful businesses 
do, but on what they are; not on their sins, but on their 
power to sin. 

Thus attacks on at least 1 8 different aspects of Ameri- 
can business have been discussed in this book. They 
are, with the chief source: 

Quantity discounts Morton Salt case 

Delivered prices Cement case 

"Good-faith" price-competi- 
tion Detroit gasoline case 

Matched prices Cement case 

Exclusive dealer contracts . . .California Standard case 

Resale-price-maintenance . . .Ethyl Gasoline case 

Lack of resale-price-mainte- 
nance Detroit gasoline case 

Keeping ahead of competi- 
tors Alcoa case 

Possession of power to ex- 
clude competitors Tobacco case 

Possession of leading positions 
in industry Tobacco case 

Price leadership Congressional attacks 

Administered prices Congressional attacks 

Vertical integration Schine, Paramount, A&P cases 



THE FOLKLORE OF TRUST-BUSTING 189 

Horizontal integration A&P case 

Obtaining lower prices and 

transmitting to consumer . . A&P case 
Cutting prices to get volume . A&P case 
"Uneconomic" profit rates . .A&P case 
Mere size Griffith case, Congressional at- 
tacks 

It is hard to see how any firm of importance in America 
can fail to be guilty of violating some, if not most, of 
these canons or interpretations. In other words, if these 
things are all wrong, American business is all wrong and 
can be made right by nothing short of utter tear-down 
and re-assembly along totally different lines. (And the 
results, it might be added, would be such as to make the 
authors of the Sherman Antitrust Act turn over in their 
graves.) 

For the roots of this distrust we may look to politics. 
And for some analysis of them we may perhaps borrow 
some lore from the psychiatrists. Politics is largely the 
expression of emotions rather than logic. And emotions 
are the psychiatrists' business — especially the emotions 
that arise out of fear and the ones that conflict with each 
other. 

The psychiatrists find two syndromes, or sets, of emo- 
tions which seem to fit the case here. One is paranoia 
and the other is what they call "compulsion neurosis." 
Paranoia is the "illusion of persecution." And it seems 
to take mass form in such mass illusions as fear of capi- 
talists, of the Jews, of Wall Street, of the Catholic Church, 
of the "liquor interests," of the "Vested Interests," of the 
New Deal, of the Square Deal, or of Big Business. 

Paranoid fears have two conspicuous characteristics in 
the individual and the same thing seems to be true in the 
mass. In the first place, they are vague, profound, and 



190 THE FOLKLORE OF TRUST-BUSTING 

almost inaccessible to reasoning. They are almost like 
the fear of apple-trees and odd-shaped fence-posts in the 
night. But in the second place, they seem somehow to 
involve the projection on the person or group feared, of 
hostile, guilty or dangerous feelings that the paranoid 
cannot accept or admit in himself. "I hit him because 
he intended to hit me," is the classic example. Every- 
body has a bit of this in his make-up, as indicated in the 
old saying, "You can judge a man's faults by what he 
criticizes in others." 

If there is anything to this, it seems to fit the case at 
hand. The burden of the attack on business is that it 
has too much "power." But it goes, almost without 
saying, that insofar as the attack succeeds, it puts and 
will put tremendous new powers in the hands of the 
very government lawyers who are spearheading the 
attack. 

The "compulsive," in psychiatric idiom, is the idealist 
who feels that he is unusually bad but who, paradoxically, 
intends in the future to remake himself into something 
unusually good. He is compelled by an inner drive to 
hitch his wagon to a star and to try constantly to perfect 
himself. It is as hard for him to satisfy himself as it is 
for a business man to satisfy a government lawyer. He 
is inclined to expect other people to keep likewise for- 
ever trying to "improve themselves." If they won't, as 
is usually the case, he will often try to do it for them 
himself. Though he is honest, reliable, and a hard 
worker, people usually consider him 'hard to get on 
with.' They may admire him, but they don't particu- 
larly like him; and the feeling is often mutual. So the 
"compulsive" is usually somewhat lonesome, and feels 
somewhat unappreciated. 

The pattern of the present attack on business seems to 



THE FOLKLORE OF TRUST-BUSTING 191 

have been conceived in an attitude similar to that of the 
"compulsive" toward himself. Those who have it tend 
to view the "present system" as unusually bad, but they 
tend to assume that it could be resolved into something 
unusually good. If the operators of the system seem 
inclined to feel that the system isn't completely bad and 
that, after all, it naturally gets a little better every day, 
these economic perfectionists are alarmingly eager to take 
on the responsibility of perfecting it themselves. (It is 
interesting to note in this connection that Dr. Freud, the 
grandfather of modern psychiatry, drew many of his 
early concepts and analogies from the field of politics, 
such things as repression, freedom, self-government, 
censor, the "lawless instincts," the "Id" and so on.) 

Still another source for the feelings of many intellec- 
tuals, supporting the current attack on business, may be 
a sort of secularization of the theological dualism of many 
Protestant churches. In the nineteenth century, many 
people believed firmly that the world was a battle-ground 
between two great personal Powers: God and the Devil. 
The one was wholly Benevolent, the other wholly bad. 

"What was not of God, was of the Devil." 

The modern fashionable thinker seems to have changed 
the subjects, but to have retained the same general idea. 
Government, spelled with a capital "G," seems to have 
acquired the halo, as omnipotent, omniscient, and above 
all benevolent; while Business, also spelled with an initial 
capital, seems to have acquired the horns, as greedy, short- 
sighted, and probably malevolent. It may perhaps be 
significant that many leaders of the modern attack on 
business are, like Supreme Court Justice William O. 
Douglas, who has done more, probably, than any other 
man to press the attack, sons of Protestant ministers. 

Such people seem to feel in their bones that every 



192 THE FOLKLORE OF TRUST-BUSTING 

attack on business, particularly against large corporations, 
is another battle for Good against Evil in a permanent 
crusade. They tend to divide the world into the essen- 
tially good and the essentially bad people. 

The result often tends to deteriorate into a hair-raising 
melodrama, solemnly but erroneously called "economics," 
in which the good people are all good and the bad people 
are all bad. All the economic "sins" of restricting out- 
put, raising prices, cutting prices, and, in general, chisel- 
ing, cheating, and squeezing are vices solely of the villains; 
and all the known economic virtues are hung like haloes 
around the heads of the good people, who can do no 
wrong, or who, if they do wrong, at least mean well. 

Nobody ever says this. But a lot of people seem to 
feel this way, especially about government officials, on 
the one hand, and business managements, on the other. 



iy. Conclusion 



The present situation cannot last. It involves a pre- 
posterous contradiction in American ways of getting 
things done. The morals of the business community 
and the findings of law of the federal courts are in 
head-on collision. Almost straight through the fabric of 
American business, what is honorable and useful bv one 
standard is criminal by the other. 

The paradox has not yet come to the public's atten- 
tion for two reasons. In the first place, the law moves 
slowly. It takes years for some antitrust cases to move 
through the courts. Neither the Department of Justice 
nor the Federal Trade Commission have been getting a 
fraction of the money from Congress that they would 
need to take up all the cases that, on its face, the present 
interpretation of the antitrust laws would enable and 
even require them to prosecute. 

In the second place, the battle has so far looked merely 
like a battle between lawyers over technicalities. The 
Detroit workman, stopping to "gas up" for the weekend 
on his way home Friday night, could not know that the 
question whether a good-faith price-discrimination re- 
buttal under Section 2(b) of the Clayton Act does or 
does not apply to Section 2 (a) might make a difference 
of a half -cent a gallon in his purchase. The consumer 
has had no inkling, until A&P began to spread its case 

193 



194 CONCLUSION 

before the public, that it was his pocket-book over which 
the battle was raging. 

Since the essential purpose of all the variegated attacks 
has been to hamper the more successful business for the 
benefit of the less successful business, the result has been 
not to clarify the law, but to dissolve it. When the 
millions of words are boiled down dry, what is left is 
merely a rule that the bigger companies are almost in- 
variably wrong on some count or other and the little 
companies almost invariably right. The result is that 
nobody knows what is legal and what isn't. The law 
is what the government lawyers say it is. And they 
are essentially interested not in what is done, but in njoho 
does it. 

The purpose of the attack, in the last analysis, is to 
stop the clock and turn it back. It would keep the dis- 
tribution industries the way they are, discourage tech- 
nological innovation, break down the modern integrated 
company, hamper and baffle the normal processes of price 
reduction, and upset the stability and security that the 
really big companies achieve through their widespread 
diversification and innovation. 

In Chapters 5 and 6, it was pointed out how the Fed- 
eral Trade Commission, by confusing "injury to compe- 
tition" with "injury to competitors," was thereby soften- 
ing competition at the consumer's expense. But the 
consumer will also have to pay for the attacks of the 
Department of Justice, under the Sherman Act, on the 
Big Three's and Four's of industry, on vertical and hori- 
zontal integration, and on plain bigness in business. 
They, too, are attacks aimed at protecting the small com- 
petitor, not the consumer, as the government briefs and 
court decisions amply indicate, and the consumer will 
have to pay for them. 



CONCLUSION 195 

These attacks hit not only the consumer, they jeopar- 
dize the national defense. This is not merely because, if 
continued with the present rate of success, they would 
require a complete disorganization and reorganization of 
American business during a national emergency. The 
American public is not likely to let them go that far. 
It is because the armed forces need, for their proper 
supply and industrial support, "dominant companies," 
integrated companies, and very big companies, as well as 
little companies. They needed them in World War II, 
they need them now, and they will need them in the 
future. The breakup of the leading integrated com- 
panies and the divorce, divestiture, or dissolution of the 
biggest producers and distributors, whether integrated 
or not, is a luxury the country cannot afford. Its "great 
concentrations of economic power" in American industry 
are more essential to the nation's defense than its great 
concentrations of administrative power in Washington. 

The new interpretations of the antitrust laws endanger 
the political structure of the country. They disintegrate 
the law, making it a respecter of persons, which tends to 
be no law at all. They upset the balance of power be- 
tween Congress and the courts, by judicial legislation, 
which is a usurpation of Congress' role. Whatever 
"power" they take away from business organizations will 
not revert to the people but is automatically being appro- 
priated by government agencies. 

An United States Senator stated over 70 years ago: 

I do not dread these corporations as instruments of power 
to destroy this country, because there are thousands of 
agencies which can regulate, restrain and control them. 
But there is a corporation we may all dread. That corpo- 
ration is the Federal Government. From the aggression of 
this corporation there can be no safety if it is allowed to 



196 CONCLUSION 

go beyond the well-defined limits of its power. I dread 
nothing so much as the exercise of ungranted and doubtful 
powers by this Government x 

A newspaper sold on the streets of London a hundred 
years ago said: "The greatest tyranny has the smallest 
beginnings. From precedents overlooked, from remon- 
strances despised . . . springs the tyrannical usage which 
generations of wise and good men may hereafter per- 
ceive and lament and resist in vain. . . ." 2 

And the Governor of a great state once said: 

Were it possible to find master minds so unselfish, so 
willing to decide unhesitatingly against their own personal 
interests or private prejudices, men almost God-like in their 
ability to hold the scales of justice with an even hand, such 
a government might be to the interests of the country. But 
there are none such on our political horizon, and we cannot 
expect a complete reversal of all the teachings of history. 3 



Bibliographical References 



Chapter 1: THE SUPREME COURT REWRITES THE LAW 

1 U. S. v. Southeastern Underwriters Association, 322 U. S. (1944). 

2 Anderson et al., v. Mt. Clemens Pottery Co., 328 U. S. 680 (1946). 
Bay Ridge Operating Co., Inc. v. Jas. Aaron, et al., 334 U. S. 446 
(1948). 

3 Address before Section of Judicial Administration of American 
Bar Association, Seattle, September 8, 1948. 

4 80 Congressional Record 9419, June 15, 1936. 

5 Paul v. Virginia, 75 U. S. (8 Wall.) 168, (1869). 

G U. S. v. Southeastern Underwriters Association, 322 U. S. (1944). 

7 Kirschbaum v. Walling, June 1, 1942. 

8 Anderson et al. v. Mt. Clemens Pottery Co., 328 U. S. 680 (1946). 

9 Bay Ridge Operating Co., Inc. v. James Aaron, et al., 334 U. S. 446 
(1948). 

10 In 1949 the Supreme Court set aside the conviction of Harold 
Christoffel for perjury before a Congressional committee, because there 
was some evidence that only eleven Congressmen, two short of a 
quorum, heard the lie that he was not a Communist. The Court dis- 
regarded prior decisions and the custom and practice of Congress for 
over 150 years that a quorum is presumed to continue unless a point of 
"no quorum" is raised. 

11 U. S. v. Hutcheson et al., 312 U. S. 219, page 245, Justice Hughes 
joining. 

12 Nye et al. v. U. S. et al., 313 U. S. 33, page 57; Justices Hughes 
and Roberts joining. 

13 U. S. v. Classic, 313 U. S. 299, page 341; Justices Black and 
Murphy joining. 

14 Cloverleaf v. Patterson, 315 U. S. 149, page 179; Justices Murphy 
and Byrnes joining. 

15 U. S. v. Pink, 315 U. S. 203, page 256; Justice Roberts joining. 

16 National Broadcasting Company, Inc., et al. v. U. S., 319 U. S. 190, 
page 238; Justice Roberts joining. ^ 

i? Addison v. Holly Hill Co., 322 U. S. 607, page 640; Justices Black 
and Murphy joining. 

18 Duncan v. Kahanamoku, 327 U. S. 304, pages 338, 343; Justice 
Frankfurter concurring. 

197 



198 BIBLIOGRAPHICAL REFERENCES 

19 F.T.C. v. Gratz, 253 U. S. 421 (1920). 

20 60 Stat. 243, 5 U.S.C.A. 1009 (Supp. 1947). 

21 F.P.C. v. Hope Natural Gas Company, 320 U. S. 591 (1944). 

22 S.E.C. v. Chenery Corp., 332 U. S. 194 (1947). 

23 F.T.C. v. Morton Salt Co, 334 U. S. 37 (1948). 

24 Lowell B. Mason, press conference, Chicago, reported in the New 
York Times, June 29, 1948. 

25 F.T.C. v. Cement Institute, 333 U. S. (1948). 

26 Aetna Portland Cement Co. v. Federal Trade Commission, 157 
F. (2nd). 



Chapter 2: EVERYBODY OUT OF STEP BUT THE 
GOVERNMENT LAWYERS 

i Sugar Institute v. U. S, 297 U. S. 533 (1936). 

2 F.T.C. v. Cement Institute, 333 U. S. 683 (1948). 

3 Lowell B. Mason, Statement as prepared for delivery before the 
Trade Policies Sub-Committee of the Committee on Interstate and 
Foreign Commerce of the Senate, Friday, June 4, 1948. 

4 Civil Service Committee, February 13, 1947. 



Chapter 3: THE ARGUMENT OVER WHETHER THERE 
IS AN ARGUMENT 

1333 U.S. (1948). 

2 Address before Boston Conference on Distribution, October 26, 
1948. 

3 Address before the Section of Judicial Administration of the 
American Bar Association; quoted in Antitrust Law Symposium of the 
Section on Antitrust Law of the New York State Bar Association, 
January 26, 1949, page 30. C.C.H. 

4 Reported in the N. Y. Journal of Commerce, November 9, 1948. 

5 Reported in the N. Y. Journal of Commerce, November 20, 1948. 

6 Speech before City Club of Denver, December 28, 1948. 

7 U . S. News & World Report, Interview, copyrighted November 
25, 1949. (This and other interviews, so indicated, are quoted from 
copyrighted material in U. S. News & World Report, an independent 
weekly magazine on national and international affairs, published at 
Washington.) 

8 Proceedings of Symposium, Section on Antitrust Law, New York 
State Bar Association, January 25, 1950, page 37, C.C.H. (Commerce 
Clearing House, Inc.). 

9 Friedrick Hayek, The Road to Serfdom, Chapter 6. London: 
George Rutledge & Sons, Ltd., 1946. 

10 Dickinson, "Legal Rules: Their Function in the Process of De- 
cision," 79 University of Pennsylvania Law Review, 833, 846-847 
(1930). See also Pound, "The Theory of Judicial Decision," 36 
Harvard Law Review 940, 957 (1923). 



BIBLIOGRAPHICAL REFERENCES 199 

11 Message to the Joint Session of Congress, January 20, 1914. 

12 Economist, April 10, 1948, page 574, col. 2. 

Chapter 4: THE MORTON SALT CASE i 

iF.T.C. v. Morton Salt Co., 334 U. S. (1948). 

2 The heart of the Sherman Act lay in two sections in the follow- 
ing words: 

"Section 1. Every contract, combination in the form of trust or 
otherwise, or conspiracy, in restraint of trade or commerce ... is 
hereby declared to be illegal . . . 

"Section 2. Every person who shall monopolize, or attempt to 
monopolize, or combine or conspire with any other person or persons, 
to monopolize any part of the trade or commerce . . . shall be deemed 
guilty of a misdemeanor, . . ." 

3 Goodyear had sold about $120,000,000 worth to Sears at a profit 
of about $7,000,000, but had made about $20,000,000 on the sale of 
about the same amount to independent tire dealers. 

4 Goodyear Tire and Rubber Co. v. F.T.C., 101 F. 2nd (CCA. 6th 
1939) cert, denied, 308 U. S. 557 (1939). 

5 S. Rep. No. 1502, 74th Cong., 2nd Sess. 4. 

6 William J. Warmack, Robinson-Patman Symposium, 1947, C.C.H., 
pages 105 et seq. 

Chapter 5: THE FORGOTTEN CONSUMER 

1 U. S. v. Eastern States Retail Lumber Association, 234 U. S. 600 
(1914) and Dr. Miles Medical Company v. John D. Park & Sons Co., 
22 U. S. (1911). 

2 Ethyl Gasoline Corp., v. U. S., 309 U. S. (1940). 

3 In the Matter of Middle Atlantic Distributors, Inc., et al., FTC 
Docket No. 5634. 

4 CR. 11364, Western District of Wisconsin, 1936, companion case 
to the so-called "Madison case," 310 U. S. 150. 

5 Rec. 5304; 173 F. 2nd. 210, 217. 

6 State of Wisconsin v. Retail Gasoline Dealers Association of 
Milwaukee, Inc., et al., Circuit Court of Milwaukee County, Case No. 
213-601, May 11, 1949. C.C.H. Trade Regulation Service, pages 63, 
284. 

7 Address, Antitrust Law Symposium, 1950; C.C.H., page 26. 

8 80 Cong. Rec. 3117. 

9 80 Cong. Rec. 3599. 

Chapter 7: MOUSETRAP MAKER'S HAZARD 

1 Apex Hosiery Co., v. Leader, 310 U. S. 469, 60 S. Ct. 982, 84 L. Ed. 
1311 (1940). 

2 Alva Johnston, "A Reporter at Large," The New Yorker, 
January 24 and 31, 1942. 



200 BIBLIOGRAPHICAL REFERENCES 

3 C.C.H. The Federal Antitrust Laws, 1949, page 173. 

4 Letter of Transmittal and Memorandum for the President's Com- 
mittee on Business and Government Relations, submitted by a special 
Committee of the Section on Antitrust Law of the New York State 
Bar Association, July 10, 1950. 

5 A good part of this was quoted favorably verbatim by the 
Supreme Court in the Tobacco case, and all of it has the force of a 
top-court finding due to legal circumstances cited above. 

6 U. S. v. Aluminum Company of America, 148 F. 2nd. 416 (1945). 

7 Interview, U. S. News & World Report, November 11, 1949. 



Chapter 8: OPPORTUNITY FOR ABUSE 

1 Testimony before House Judiciary subcommittee on the antitrust 
laws, reported in New York Journal of Commerce July 21, 1949. 

2 Address before Public Relations Association of America, Decem- 
ber 6, 1950. 

3U. S. v. United States Steel Corporation, 251 U. S. 417 (1920). 

4 U. S. v. United States Steel Corporation, 251 U. S. 417 (1920). 

5 U. S. v. Swift and Co., 286 U. S. 106 (1932). 

6 American Tobacco Company v. U. S., 328 U. S. 781 (1946). 

7 U. S. v. Columbia Steel Co., 334 U. S. 495 (1948). 

8 U. S. v. L. C. Griffith, 334 U. S. 109 (1948). 

9 Speech of Assistant Attorney-General Herbert A. Bergson, Janu- 
ary 25, 1950, "Antitrust Law Symposium," C.C.H. page 86. He said, 
"In seeking to dissolve this company we do not predicate our case on 
the size of the defendant company, which measured in dollars and 
cents is very small, but which from the standpoint of position in the 
industry is so great that it possesses monopoly power." 

io U. S. v. Trenton Potteries Co., 273 U. S. (1927). 

11 American Column & Lumber Co. v. U. S., 257 U. S. (1921). 

12 Eastern States Retail Lumber Dealers' Association v. U. S., 234 
U.S. (1914). 

is U. S. v. Addyston Pipe & Steel Co., 175 U. S. (1899). 

1 4 American Tobacco Company v. U. S., 328 U. S. 781 (1946). 

is U. S. v. Griffith, 334 U. S. (1948). 

16 Note the words of Justice Douglas in the Griffith case, "Monopoly 
power . . . may itself constitute an evil and stand condemned . . . 
even though it remains unexercised." 



Chapter 9: THE "VIRULENT GROWTH OF MONOPOLY 
POWER" * 

* Douglas, individual dissent, Standard Oil Co. of California, v. 
U. S., final paragraph. Op. cit. 



BIBLIOGRAPHICAL REFERENCES 201 

1 Peter F. Drucker, "The Care and Feeding of Small Business," 
Harper's Magazine, August 1950. 

2 Jersey and General Motors. 

3 Rufus S. Tucker, "Concentration and Competition," Journal of 
Marketing, February 1940. 



Chapter 10: OLIGOPOLY 

1 Interview, U. S. News & World Report, September 23, 1949. 

2 Assistant Attorney-General Herbert A. Bergson, reported in 
U. S. News & World Report, September 30, 1949. 

3 Concentration of Productive Facilities, 1941, in 26 Selected In- 
dustries. 

4 Statement before the Subcommittee on the Growth of Monopoly, 
House Judiciary Committee, July 13, 1949. 

5 U. S. v. Trenton Potteries Co., 273 U. S. (1927). 

6 Cement Mfgrs. Assoc, v. U. S., 268 U. S. 588 (1925). 

7 Webster's New International Dictionary, 2nd ed. Springfield, 
Mass., G. & C. Merriam Company, 1947. 

8 Interstate Circuit v. U. S., 306 U. S. (1939). 

9 Laurence I. Wood, "The Supreme Court and a Changing Anti- 
trust Concept," University of Pennsylvania Law Review, February 
1949, Vol. 97, No. 3, page 330. 

io American Tobacco Company v. U. S., 328 U. S. 781 (1946). 

11 Eugene V. Rostow, "The New Sherman Act," 14 University of 
Chicago Law Review. Chicago, University of Chicago Press, 1947. 

12 Laurence I. Wood, ibid., page 339. 



Chapter 11: CONCENTRATION AND COMPETITION 

1 B. Bradford Smith, "Facts About 'Concentration' and Profits in 
the Steel Industry." Statement Prepared for the Subcommittee on the 
Study of Monopoly Power of the House Committee on the Judiciary, 
April 26-28, 1950. 

2 Ibid., page 2. 

3 Peter B. Drucker, "How Big is Too Big?" Harper's Magazine, 
June, 1950. 

4 It is perhaps notworthy that the President, in his statement quoted 
in the previous chapter about concentrated industries, does not say 
that they do restrict production and so on but only that they can. 

5 Benjamin F. Fairless, address before Baltimore Association of 
Commerce, April 21, 1950. 



202 BIBLIOGRAPHICAL REFERENCES 

Chapter 12: MONOPOLISTIC COMPETITION 

1 Canto XCIX, Rubaiyat, Edward Fitzgerald, translator. 

2 "Memorandum for the President's Committee on Business and 
Government Relations," Submitted by a Special Committee of the 
Section on Antitrust Law of the New York State Bar Association, 
July 10, 1950. 

3 Aetna Portland Cement Co. v. F.T.C., 157 F. (2nd) 1946). 

4 Ibid., page 563. 

5 Ibid., 568. 

6Pevely Dairy Co. v. U. S., 178 F. (2nd) 363 (1949). 

7 Antitrust Law Symposium, New York State Bar Association, 1949, 
Edwin B. George, of Dun & Bradstreet, Inc., pages 55, 57. C.C.H. 

8 Address, Charles Sawyer, Harvard Club of Boston, June 10, 1950. 

9 Competition in Steel, David F. Austin, Report to the House 
Judiciary Subcommittee, 1950. 

10 Remarks, Boston Conference on Distribution, October 26, 1948. 

11 Edward H. Collins, New York Times, Monday, May 8, 1950. 

12 H. Thomas Austern, Antitrust Law Symposium, 1949, page 42; 
C.C.H. 



Chapter 13: ADMINISTERED PRICES 

1 Statement of John D. Clark before Subcommittee on the Growth 
of Monopoly, House Judiciary Committee, July 13, 1949. 

2 Walter F. Crowder, Chief of Special Research and Analysis Sec- 
tion, Bureau of Foreign and Domestic Commerce, United States De- 
partment of Commerce; TNEC Monograph No. 27, The Structure of 
Industry, Part V, Chapter V, "The Concentration of Production in 
Manufacturing." 

3 Ibid., page 395. 

4 Dr. Alfred C. Neal, vice-president, Federal Reserve Bank of 
Boston, Industrial Concentration and Price Inflexibility, page 140, pub- 
lished by the American Council on Public Affairs in cooperation with 
Brown University. 

5 Dr. Gardiner C. Means, "Industrial Prices and Their Relative In- 
flexibility," Senate Document No. 13, 74th Congress, First Session, 
January, 1935. 

6 Ibid., page 9. 

7 Dr. Rufus S. Tucker, American Econoviic Review, Volume 
XXVIII, No. 1, March, 1938, page 42. 

8 Judge Major, in Aetna Portland Cement Co. v. F.T.C., 157. 
F. (2nd) 565 (1946). 

9 W. Jablonski, "Petroleum Comments." New York Journal of 
Commerce, September 15, 1949. 

10 Sidney A. Swensrud, now president of Gulf Oil, quoted in 
TNEC Monograph No. 39-A, page 49. 



BIBLIOGRAPHICAL REFERENCES 203 

11 Charles Sawyer, Secretary of Commerce, Address, Harvard Club 
of Boston, June 10, 1950. 

12 Dr. Peter Drucker, Harper's Magazine, June 1950, page 75. 

13 Wall Street Journal, August 23, 1949. 



Chapter 14: INTEGRATION 

1 U. S. v. Northern Securities Co., 193 U. S. 197 (1904). 

2 Dr. Walter Adams, testimony before the Monopoly Subcommittee 
of the House Judiciary, July, 1949. 

3 Eugene V. Rostow, "The New Sherman Act," 14 University of 
Chicago Law Review. Chicago, University of Chicago Press, 1947. 

4 In fact most of them have gotten out of most of their retail 
marketing. 

^Schine Chain Theatres, Inc., et al., v. U. S., 334, U. S. 116 (1948). 
6 U. S. v. Paramount Pictures, Inc., 334 U. S. 131, 144 (1948). 
"Standard Oil Company of California v. U. S., 279 U. S. 1104, 
footnote (1948). 



Chapter 15: INTEGRATED WE STAND 

1 Edwin S. Hall, former General Counsel, Standard Oil Company 
(N. J.). From a speech given before the Tennessee Oil Men's Asso- 
ciation, Chattanooga, June 14, 1949. 

2 W. S. Farish, testimony before TNEC, Part 17, pages 9748-9749. 

3 J. Howard Pew, TNEC hearings, Pt. 14, pages 7188-7191. 

4 Dr. Robert S. Wilson, president Pan American Petroleum & 
Transport Company, TNEC hearings, Part 15, page 8373. 

5 Interview, U. S. News & World Report, November 11, 1949. 

6 Simons, Henry C. "A Positive Program for Laissez Faire," 33 
University of Chicago Press, 1934. 

7 TNEC Monograph 39-A, pages 12-13. 

8 "U. S. Court Refuses to Break Up Alcoa," New York Times, 
June 3, 1950. 



Chapter 16: THE GREAT ATLANTIC & PACIFIC 
TEA COMPANY^ 

i 173 F. 2nd. 79. 

2 Fashion Originators' Guild v. F.T.C., 312 U. S. 457 (1941). 

3 Schine Chain Theatres v. United States, 334 U. S. 110 (1948). 

4 Interview, U. S. News & World Report, November 25, 1949. 

5 Quoted in the New York Times, December 10, 1949. 

6 Morris A. Adelman, Quarterly Journal of Economics, May 1949, 
page 252. 



204 BIBLIOGRAPHICAL REFERENCES 

7 Yale Law Journal, Vol. 58, No. 6, May 1949, page 975. 
s Corn Products Company v. F.T.C., 324 U. S. 726 (1945). 
9F.T.C. v. Staley A4anufacturing Company, 324 U. S. 588 (1925). 



Chapter 17: A STRANGE NEW DEFINITION OF 
''MONOPOLIZE^ 

1 Government Brief, pages 87, 94, and 7. 

2 Government Brief, pages 110, 837. 

3 Government Brief, Court of Appeals, page 373. 

4 Interview, United States News & World Report, December 30, 
1949. 

5 Cassady & Grether, "Locality Price Differentials in the Western 
Retail Grocery Trade," Harvard Business Review, 190 (1943), page 
296. 



Chapter 18: THE ATTACK ON BIGNESS IN BUSINESS 

1 Speech to the graduating class of Washington College at Chester- 
ton, Maryland. 

2 Dissenting opinion, U. S. v. Columbia Steel Co., 334 U. S. 495 
(1948). 

3 Testimony before Special Subcommittee of House Judiciary Com- 
mittee, Nov. 30, 1949. 



Chapter 19: THE JOB OF BIG BUSINESS 

1 Crawford H. Greenewalt, testimony before Special Subcommittee 
on the Study of Monopoly Power of the House Judiciary Committee, 
November 15, 1949. 

2 Interview, U. S. News & World Report, December 30, 1949. 

3 Crawford H. Greenewalt, president of E. I. du Pont de Nemours 
& Company, interview, U. S. News & World Report, September 16, 
1949. 

4 A highly significant question was the following, asked of du 
Pont's president: "Is it not true that you have two or three depart- 
ments, and you can compensate yourself for your losses in Department 
A by your profits in Department B and C?" Answer: "That is quite 
correct, sir." Chairman: "And if an individual goes into business, 
and he has one department, he has to sustain his entire losses and 
cannot get compensation for those losses in any . . . other department. 
That is . . . one of the advantages of bigness, is that not true?" 
Answer: "Indeed, yes." 

Note that this is essentially the same question, of the "subsidization" 
of one department with the "profits" from another, raised in the case 



BIBLIOGRAPHICAL REFERENCES 205 

of vertical integration (Chapter 14) and in the case of A&P's vertical 
and horizontal integration. It is the obverse way of putting the di- 
versification of risks. 



Chapter 20: BIG CORPORATIONS AND PEOPLE 

1 It may be said that "pure research" is the reproductive system 
of the big corporation and "applied research," or "production re- 
search," is the womb in which its next generation of products is 
developed. 

2 Eugene Holman, Address before Economic Club of Detroit, 
November 8, 1948. 



Chapter 21: "BREAK 'EM UP" 

1 Paramount, Schine, Griffith, Cresent Amusement, 323 U. S. 173 
(1944). 

2 Schine Chain Theatres v. U. S., 334 U. S. 110. 
3 U. S. v. Columbia Steel Co., 334 U. S. 495 (1948). 

4 Standard Oil Co., of Calif, v. U. S., 337 U. S. 293 (1949). 



Chapter 22: HOW THE GOVERNMENT WINS ITS CASES 

1 U. S. v. Socony-Vacuum Oil Co., 310 U. S. 150 (1940). 
2 Thurlow M. Gordon, Antitrust Law Symposium, 1949, page 84. 
C.C.H. 

3 John Henry Lewin, "The Conduct of Grand Jury Proceedings in 
Antitrust Cases," Law and Contemporary Problems, School of Law, 
Duke University, Winter, 1940, Vol. VII, No. 1, page 115. 

4 See Chapter 16. 

5 Bethuel M. Webster, Antitrust Symposium, 1949, page 82. C.C.H. 

6 U. S. v. Pullman Co., 50 F. Supp. 123 (E.D. Pa. 1943). 



Chapter 23: ARM CHAIR ECONOMICS 

1 Reprinted, Viking Press, New York, 1931. 

2 B. W. Huebsch, Inc., 1921. 

3 Eugene V. Rostow, A National Policy for the Oil Industry. 
New Haven: Yale University Press, 1948. 

4 J. Howard Marshall, president, Ashland Oil & Refining Company 
and former Chief Counsel, Petroleum Administration for War, Yale 
Law Journal, June 1948. 

5 Address before American Steel Warehouse Association, Inc., 
April 27, 1950. 



206 BIBLIOGRAPHICAL REFERENCES 

Chapter 25: CONCLUSION 

1 Benjamin Hill, United States Senate, 1878. 

2 Quoted by Professor John Jewkes in foreword to Ordeal by 
Planning. 

s Franklin D. Roosevelt, 1932. 



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